A type of risk redistribution (financial transformation) whereby credit quality is enhanced by means of the securitization. This involves the pooling of assets, and then the tranching of these pools into separate sets of claims with different priorities. It also encompasses the re-allocation of specific cashflows from loans to different claims, within different ranges of seniority and duration, along with an associated range of risk and return, from short-term investment-grade liabilities down to equity.

A bank or financial institution can carry out credit transformation by investing in securities that have a lower credit standing and thus a higher yield than the bank’s funding instruments. In simple terms, credit intermediation is a bank’s attempt to generate returns through credit mismatches between assets and liabilities.