Innovations in Credit Risk Transfer: Implications for Financial Stability
40 Pages Posted: 22 Jul 2008 Last revised: 6 Feb 2009
Date Written: July 1, 2008
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.
This paper includes comments by Mohamed A El-Erian.
Keywords: Credit derivatives, credit risk transfer, financial innovations, financial stability
JEL Classification: G11, G21, G28
Suggested Citation: Suggested Citation
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- Citations
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- Abstract Views: 15053
- Downloads: 3671
- Captures
- Readers: 196
- Exports-Saves: 2
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