An analytical review of credit risk tranfer instruments
AbstractOver the second half of the 1990s, the surfacing of credit derivatives and collateralised debt obligations enlarged the range of instruments for transferring credit risk. Although the characteristics and purposes of the former are very similar to those of the latter, the tradability of the new instruments has resulted in the creation of true markets for credit risk transfer (CRT), which are very rapidly developing. CRT markets are of great interest as regards financial stability: while offering extended risk management opportunities for market participants, they also alter “traditional” relationships (between lenders and borrowers) as well as creating new types of relationships (lenders and credit protection sellers). The present review relies on existing theoretical and empirical work as well as on contacts with market practitioners to explore, from an analytical standpoint, the financial stability implications of all types of CRT instruments. In particular, it analyses the characteristics of differing CRT instruments in light of risk management and asymmetric information problems arising in financial markets. It also proposes possible avenues for further work. Four questions are successively raised: For what purposes are these products designed; why use one instrument rather than another? Who assesses credit risk: lenders, protection sellers or both? How are CRT instruments priced in practice: does pricing primarily reflect credit risk or does it also incorporate additional elements, such as counterparty, documentation or market risks? What are the potential macro-financial implications of CRT markets?
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Bibliographic InfoArticle provided by Banque de France in its journal Financial stability review.
Volume (Year): (2003)
Issue (Month): 2 (June)
Other versions of this item:
- John Kiff & François-Louis Michaud & Janet Mitchell, 2003. "An Analytical Review of Credit Risk Transfer Instruments," Financial Stability Review, National Bank of Belgium, vol. 1(1), pages 125-150, June.
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- Wagner, Wolf & Marsh, Ian W., 2006. "Credit risk transfer and financial sector stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 173-193, June.
- Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
- Parlour, Christine A. & Winton, Andrew, 2013. "Laying off credit risk: Loan sales versus credit default swaps," Journal of Financial Economics, Elsevier, vol. 107(1), pages 25-45.
- Bengtsson, E., 2013. "Fund Management and Systemic Risk - Lessons from the Global Financial Crisis," CITYPERC Working Paper Series 2013-06, Department of International Politics, City University London.
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