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An Analytical Review of Credit Risk Transfer Instruments

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  • John Kiff

    (Bank of Canada)

  • François-Louis Michaud

    (Banque de France)

  • Janet Mitchell

    ()
    (National Bank of Belgium)

Abstract

Over 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?

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by National Bank of Belgium in its journal Financial Stability Review.

Volume (Year): 1 (2003)
Issue (Month): 1 (June)
Pages: 125-150

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Handle: RePEc:nbb:fsrart:v:1:y:2003:i:1:p:125-150

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Cited by:
  1. Vanessa Redak & Eleonora Weiss, 2004. "Innovative Credit Risk Transfer Instruments and Financial Stability in Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 7, pages 64-76.

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