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Structured finance: complexity, risk and the use of ratings

Author

Listed:
  • 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.

Suggested Citation

  • Ingo Fender & Janet Mitchell, 2005. "Structured finance: complexity, risk and the use of ratings," BIS Quarterly Review, Bank for International Settlements, June.
  • Handle: RePEc:bis:bisqtr:0506f
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    References listed on IDEAS

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    1. Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
    2. Barry Eichengreen & David Leblang, 2008. "Democracy And Globalization," Economics and Politics, Wiley Blackwell, pages 289-334.
    3. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    4. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
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    1. repec:asi:aeafrj:2017:p:907-920 is not listed on IDEAS
    2. Gary A. Dymski, 2009. "Afterword: Mortgage Markets and the Urban Problematic in the Global Transition," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 33(2), pages 427-442, June.
    3. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation : a screening model," Working Paper Research 177, National Bank of Belgium.
    4. Lee, Cheuk Wing & Zhong, Jin, 2015. "Financing and risk management of renewable energy projects with a hybrid bond," Renewable Energy, Elsevier, vol. 75(C), pages 779-787.
    5. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation: a screening model," BIS Working Papers 289, Bank for International Settlements.
    6. Bernd Rudolph & Julia Scholz, 2008. "Driving Factors of the Subprime Crisis and Some Reform Proposals," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(3), pages 14-19, October.
    7. Ingo Fender & Janet Mitchell, 2009. "Incentives and tranche retention in securitisation: a screening model," BIS Working Papers 289, Bank for International Settlements.
    8. João Pinto, 2014. "The Economics of Securitization: Evidence from the European Markets," Working Papers de Economia (Economics Working Papers) 02, Católica Porto Business School, Universidade Católica Portuguesa.
    9. Christian Bauer & Bernhard Herz & Alexandra Hild, 2011. "Structured Eurobonds," Research Papers in Economics 2011-09, University of Trier, Department of Economics.
    10. Praet, Peter & Nguyen, Grégory, 2008. "Overview of recent policy initiatives in response to the crisis," Journal of Financial Stability, Elsevier, pages 368-375.
    11. Broer, Tobias, 2016. "Securitisation Bubbles: Structured finance with disagreement about default correlations," CEPR Discussion Papers 11145, C.E.P.R. Discussion Papers.
    12. Gary A. Dymski, 2014. "The neoclassical sink and the heterodox spiral: political divides and lines of communication in economics," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(1), pages 1-19, January.
    13. João Pinto & Mário Coutinho dos Santos, 2014. "Corporate Financing Choices after the 2007-2008 Financial Crisis," Working Papers de Economia (Economics Working Papers) 03, Católica Porto Business School, Universidade Católica Portuguesa.
    14. 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.
    15. repec:ces:ifodic:v:6:y:2008:i:3:p:14567230 is not listed on IDEAS
    16. Bulbarelli, Miriam, 2016. "The housing finance system in Italy and Spain: Why did a housing bubble develop in Spain - and not in Italy?," PIPE - Papers on International Political Economy 26/2016, Free University Berlin, Center for International Political Economy.
    17. 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.
    18. Ingo Fender & Janet Mitchell, 2009. "The future of securitisation: how to align incentives," BIS Quarterly Review, Bank for International Settlements, September.
    19. Claudio Borio, 2010. "Ten propositions about liquidity crises," CESifo Economic Studies, CESifo, pages 70-95.
    20. 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, Católica Porto Business School, Universidade Católica Portuguesa.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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