Innovations in credit risk transfer: implications for financial stability
AbstractBanks 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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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 255.
Length: 40 pages
Date of creation: Jul 2008
Date of revision:
credit derivatives; credit risk transfer; financial innovations; financial stability;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-30 (All new papers)
- NEP-BAN-2008-07-30 (Banking)
- NEP-RMG-2008-07-30 (Risk Management)
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