Innovations in Credit Risk Transfer: Implications for Financial Stability
Bank for International Settlements, Monetary and Economic Department, 2008 - Credit - 33 pages
Banks and other lenders often transfer credit risk to liberate capital for further loan intermediation. This paper aims to explore the design, prevalence and effectiveness of credit risk transfer (CRT). The focus is on the costs and benefits for the efficiency and stability of the financial system. After an overview of recent credit risk transfer activity, the following points are discussed: motivations for CRT by banks; risk retention; theories of CDO design; specialty finance companies. As an illustration of CLO design, an example is provided showing how the credit quality of the borrowers can deteriorate if efforts to control their default risks are costly for issuers. An appendix is provided on CDS index tranches.
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implications for ﬁnancial stability
Why does a bank transfer credit risk?
CDS index tranches
1 other sections not shown
adverse selection asset-backed securities assets balance sheets bank's basis points borrower cash ﬂows CDO tranches CDPCs CDS positions CDS protection CDX.NA.lG CLO structure collateral pool collateralised debt obligations copula correlation parameter costs and beneﬁts covenant packages credit derivative credit quality credit risk transfer CRT technology default correlation default losses default risk default swaps diversiﬁcation Donald Kohn Dufﬁe efﬁciency equity pieces equity residual equity tranche example Financial ﬁnancial system ﬁnd ﬁrms ﬁrst ﬁve-year fraction q hedge funds index products inﬂuence innovations investors issuance issuer lender level X q liquidity loan portfolio loan sale Lucas Papademos market value mezzanine tranche million moral hazard NationsBank Professor Dufﬁe's rating agencies regulatory capital relatively retention fraction Richard Cantor risk neutral running spread securities securitisation sell loans seller of protection senior tranches signiﬁcant signiﬁcantly sold specialty ﬁnance companies Speciﬁcally sufﬁciently syndicated loan tranche price transfer credit risk valuation