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Default risk sharing between banks and markets : the contribution of collateralized debt obligations

Author: Günter Franke; Jan Pieter Krahnen; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2005.
Series: Working paper series (National Bureau of Economic Research), no. 11741.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
"This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Günter Franke; Jan Pieter Krahnen; National Bureau of Economic Research.
OCLC Number: 62241089
Notes: November 2005.
Description: 1 online resource (38 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 11741.
Responsibility: Günter Franke, Jan Pieter Krahnen.

Abstract:

"This paper contributes to the economics of financial institutions risk management by exploring how loan securitization affects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to expand its loan business, thereby affecting systematic risk. For a sample of European CDO issues, we find an increase of the banks' betas, but no significant stock price effect around the announcement of a CDO issue"--National Bureau of Economic Research web site.

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