Innovations in credit risk transfer: implications for financial stability
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.
|Date of creation:||Jul 2008|
|Date of revision:|
|Contact details of provider:|| Postal: Centralbahnplatz 2, CH - 4002 Basel|
Phone: (41) 61 - 280 80 80
Fax: (41) 61 - 280 91 00
Web page: http://www.bis.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cebenoyan, A. Sinan & Strahan, Philip E., 2004. "Risk management, capital structure and lending at banks," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 19-43, January.
- Gary Gorton & George Pennacchi, 1990.
"Banks and Loan Sales: Marketing Non-Marketable Assets,"
NBER Working Papers
3551, National Bureau of Economic Research, Inc.
- Gorton, Gary B. & Pennacchi, George G., 1995. "Banks and loan sales Marketing nonmarketable assets," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 389-411, June.
- Hayne E. Leland and David H. Pyle., 1976.
"Informational Asymmetries, Financial Structure, and Financial Intermediation,"
Research Program in Finance Working Papers
41, University of California at Berkeley.
- Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
- Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993.
" Risk Management: Coordinating Corporate Investment and Financing Policies,"
Journal of Finance,
American Finance Association, vol. 48(5), pages 1629-58, December.
- Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
- Acharya, Viral V & Johnson, Tim, 2005.
"Insider Trading in Credit Derivatives,"
CEPR Discussion Papers
5180, C.E.P.R. Discussion Papers.
- Douglas Gale, 1992. "Standard Securities," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 731-755.
- Goderis, B.V.G. & Marsh, I. & Vall Castello, J. & Wagner, W.B., 2006.
"Bank Behavior with Access to Credit Risk Transfer Markets,"
2006-100, Tilburg University, Center for Economic Research.
- Goderis, Benedikt & Marsh, Ian & Vall Castello , Judit & Wagner, Wolf, 2007. "Bank behaviour with access to credit risk transfer markets," Research Discussion Papers 4/2007, Bank of Finland.
- Duffee, Gregory R. & Zhou, Chunseng, 1999.
"Credit Derivatives in Banking: Useful Tools for Managing Risk?,"
Research Program in Finance, Working Paper Series
qt7g67n911, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
- Duffee, Gregory R. & Zhou, Chunsheng, 2001. "Credit derivatives in banking: Useful tools for managing risk?," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 25-54, August.
- Gregory R. Duffee and Chunsheng Zhou., 1999. "Credit Derivatives in Banking: Useful Tools for Managing Risk?," Research Program in Finance Working Papers RPF-289, University of California at Berkeley.
- Gregory R. Duffee & Chunsheng Zhou, 1997. "Credit derivatives in banking: useful tools for managing risk?," Finance and Economics Discussion Series 1997-13, Board of Governors of the Federal Reserve System (U.S.).
- Franklin Allen, Douglas Gale, 1988.
"Optimal Security Design,"
Review of Financial Studies,
Society for Financial Studies, vol. 1(3), pages 229-263.
- Franklin Allen & Douglas Gale, . "Optimal Security Design," Rodney L. White Center for Financial Research Working Papers 26-87, Wharton School Rodney L. White Center for Financial Research.
- Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
- Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
- Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
When requesting a correction, please mention this item's handle: RePEc:bis:biswps:255. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.