Asset securitization is the transformation of generally illiquid assets into securities that can be traded in the capital markets (asset-backed securities; ABS). Pools of assets are transferred to a bankruptcy-remote entity such as a grantor trust or special-purpose corporation that issues securities or ownership interests in the cash flows of the underlying collateral. The issuer is typically protected from bankruptcy by various structural and legal arrangements. Normally the sponsor that establishes the issuer is the originator or provider of the underlying assets. Banking organizations may be involved in asset-securitization in many ways: originating the assets to be pooled, packaging the assets for securitization, servicing the pooled assets, acting as trustee for the pool, providing credit enhancements, underwriting or placing the ABS, or investing in the securities. Individual securitization arrangements often possess unique features. Traditional lending activities are generally funded by deposits or other liabilities, and both the asset and related liabilities are reflected on the balance-sheet. Deposit liabilities must generally increase in order to fund additional loans. In contrast, the securitization process generally does not increase on-balance-sheet liabilities in proportion to the volume of loans or other assets securitized. When banking organizations securitize their assets and these transactions are treated as sales, both the assets and the related asset-backed securities (i.e., liabilities) are removed from the balance sheet. The cash proceeds from the securitization transactions are generally used to originate or acquire additional loans or other assets for securitization and the process is repeated. Thus, for the same volume of loan originations, securitization, in comparison to traditional lending activities, results in lower assets and liabilities. Issuers obtain a number of advantages from securitizing assets, including improving their capital ratios and return on assets, monetizing gains in loan value, generating fee income by providing services to the securitization conduit, closing a potential source of interest-rate risk, and increasing institutional liquidity by providing access to a new source of funds. Investors are attracted by the high credit quality of the ABS, as well as their attractive returns. For the most part, the risks that financial institutions encounter in the securitization process are identical to those that they face in traditional lending transactions. (Federal Reserve-Trading and Capital-Markets Activities Manual and Bank Holding Company Supervision Manual)