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Restoring Confidence In The Financial System: See-through leverage: a powerful new tool for revealing and managing risk by Sean Tully, Richard Bassett

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5: How STL Should Be Used In Practice By Investors, Regulators And Rating Agencies

Chapter summary
  • STL is an easy to understand, easy to calculate, powerful risk measurement tool.
  • In this chapter we will re-introduce STL in another intuitive way, and show how it differs from other more common references to leverage for structured credit products.
  • We will give a number of examples of how to calculate STL across different asset types – including automobile loans, credit cards and home equity loans – and it will become clearer why certain structures blew up first and why some have not blown up at all.
  • We will also introduce yet another way to think about STL, which will explain why even banks who hedged themselves found they accrued large ...

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