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Structured finance: complexity, risk and the use of ratings

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  • Ingo Fender
  • Janet Mitchell

Abstract

This article reviews the principal features of structured finance instruments. Key to understanding the risk properties of these products is the evaluation of the risks associated with their contractual structure, in addition to the modelling of the credit risk of the underlying asset pools. It is argued that structured finance ratings, though useful, have intrinsic limitations in fully gauging the risk of these products, even as their complexity creates incentives to rely more heavily on ratings than for other rated securities. Market participants and public authorities need to take account of this in their assessments of structured finance instruments and their markets.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2005)
Issue (Month): (June)
Pages:

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Handle: RePEc:bis:bisqtr:0506f

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References

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  1. Ingo Fender & John Kiff, 2004. "CDO rating methodology: Some thoughts on model risk and its implications," BIS Working Papers 163, Bank for International Settlements.
  2. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
  3. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
  4. Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
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Cited by:
  1. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation : a screening model," Working Paper Research 177, National Bank of Belgium.
  2. João Pinto & Mário Coutinho dos Santos, 2014. "Corporate Financing Choices after the 2007-2008 Financial Crisis," Working Papers de Economia (Economics Working Papers) 03, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).
  3. Praet, Peter & Nguyen, Grégory, 2008. "Overview of recent policy initiatives in response to the crisis," Journal of Financial Stability, Elsevier, vol. 4(4), pages 368-375, December.
  4. Allen B Frankel, 2009. "The risk of relying on reputational capital: a case study of the 2007 failure of New Century Financial," BIS Working Papers 294, Bank for International Settlements.
  5. Green, Richard K., 2008. "Imperfect information and the housing finance crisis: A descriptive overview," Journal of Housing Economics, Elsevier, vol. 17(4), pages 262-271, December.
  6. Alsayyed, Nidal, 2009. "Shari’ah Board, The Task of Fatwa, and Ijtihad in Islamic Economics, and Finance," MPRA Paper 20204, University Library of Munich, Germany.
  7. Bernd Rudolph & Julia Scholz, 2008. "Driving Factors of the Subprime Crisis and Some Reform Proposals," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 6(3), pages 14-19, October.
  8. Christian Bauer & Bernhard Herz & Alexandra Hild, 2011. "Structured Eurobonds," Research Papers in Economics 2011-09, University of Trier, Department of Economics.
  9. João Pinto & Manuel Marques & William Megginson, 2013. "A Comparative Analysis Of Ex Ante Credit Spreads: Structured Finance Versus Straight Debt Finance," Working Papers de Economia (Economics Working Papers) 05, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).
  10. João Pinto, 2014. "The Economics of Securitization: Evidence from the European Markets," Working Papers de Economia (Economics Working Papers) 02, Faculdade de Economia e Gestão, Universidade Católica Portuguesa (Porto).
  11. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, September.

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