Post by Sapphire Capital on Oct 3, 2008 0:47:19 GMT 4
Innovations in Credit Risk Transfer: Implications for Financial Stability
Darrell Duffie
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
July 2008
BIS Working Paper No. 255
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.
Contact Information
James Darrell Duffie
Stanford Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-723-1976 (Phone)
650-725-7979 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Darrell Duffie
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
July 2008
BIS Working Paper No. 255
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.
Contact Information
James Darrell Duffie
Stanford Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-723-1976 (Phone)
650-725-7979 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States