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Innovations in credit risk transfer: implications for financial stability

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  • Darrell Duffie
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    Abstract

    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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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 255.

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    Length: 40 pages
    Date of creation: Jul 2008
    Date of revision:
    Handle: RePEc:bis:biswps:255

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    Related research

    Keywords: credit derivatives; credit risk transfer; financial innovations; financial stability;

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    Cited by:
    1. Alper Kara & David Marqués-Ibáñez & Steven Ongena, 2011. "Securitization and lending standards - evidence from the wholesale loan market," Working Paper Series 1362, European Central Bank.
    2. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
    3. Patrick Honohan, 2008. "Bank Failures: The Limitations of Risk Modelling," The Institute for International Integration Studies Discussion Paper Series iiisdp263, IIIS.
    4. Fender, Ingo & Mitchell, Janet, 2009. "Incentives and Tranche Retention in Securitisation: A Screening Model," CEPR Discussion Papers 7483, C.E.P.R. Discussion Papers.
    5. 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.
    6. Ekin Ayse Ozsuca & Elif Akbostanci, 2012. "An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey," ERC Working Papers 1208, ERC - Economic Research Center, Middle East Technical University, revised Dec 2012.
    7. Affinito, Massimiliano & Tagliaferri, Edoardo, 2010. "Why do (or did?) banks securitize their loans? Evidence from Italy," Journal of Financial Stability, Elsevier, vol. 6(4), pages 189-202, December.
    8. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    9. Patrick Honohan, 2008. "Risk Management and the Costs of the Banking Crisis," The Institute for International Integration Studies Discussion Paper Series iiisdp262, IIIS.

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