Prior to the Global Financial Crisis in 2008, securitization has been widely perceived as a way to disperse credit risks, and to enhance financial system’s capacity in dealing with defaults. This paper develops a model of securitization and financial stability in the form of amplification effects. This model has illustrated three different scenarios: A negative shock in the economy will lead to downturn of the economy and falling asset prices, deteriorating balance sheets and tightening financing conditions. However, if there is no shock or a positive shock, banks can improve its profitability significantly through securitization. While securitization decreases the probability of systemic crisis, banks tend to suffer more when the crisis happens as a result of over-borrowing and over-investing. This paper uses a three-period theoretical model to demonstrate the impact of securitization on the financial stability, and provides clear analytical guidelines for a new regulatory framework of securitization that account for systemic risk and systemic externalities.