Credit Securitisations and Derivatives: Challenges for the Global Markets

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Credit Securitizations and Derivatives

Daniel Roesch1 and Harald Scheule2

1University of Hannover

2University of Technology, Sydney

The Global Financial Crisis (GFC) led to an unprecedented and, by most of us, unexpected increase of impairment and loss rates for securitizations and derivatives. The disappointment of investors manifested in the criticism of models applied for measuring credit portfolio risk in relation to credit securities and derivatives.

Credit portfolio securitizations and derivatives are primarily OTC market instruments with exposures totaling approximately $40 trillion. Securitizations involve the sale of assets into bankruptcy-remote special purpose vehicles, which are funded by investors of different seniorities (tranches). Based on the nature of the securitized asset portfolios, important transaction types include asset-backed securities, collateralized debt obligations, home equity loan-backed securities and mortgage-backed securities. On the other side, credit derivatives are generally unfunded contracts and share similar structures and appraisal challenges with securitizations.

This exciting and timely book provides regulators with an overview of the risk inherent in credit securitizations and derivatives. The book aims to help quantitative analysts improve risk models and managers of financial institutions evaluate the performance of existing risk models and future model needs. The book addresses challenges in relation to the evaluation of credit ...