The Effect Of Credit Risk Transfer On Financial Stability

Rapid financial innovation has changed the distribution of risk, allowing market participants to trade credit risk in the financial sector and other sector. With the emergence of the securitization instruments and credit derivatives, credit risk transfer(CRT) market has been rapidly developed, and provides substantial benefits to the global financial system. But the credit risk transfer has also brought new risks. In July 2007, the U.S. sub-prime mortgage crisis has happened and generated a series of knock-on effect. It is concerned why sub-prime crisis broke out and how it can rapidly spread to the world. Therefore, this thesis focus on the effect of credit risk transfer on financial stability. The main structure and viewpoint is as follows:Chapter 1 is the preface. The research background and significance are proposed, relevant research are explained, research methods and possible innovations are also introduced.Chapter 2 describes the instruments, participants and the trend of CRT market. The range of CRT instruments is continually expanding. At present, the credit risk transfer market participants are mainly commercial banks, universal banks, securities dealers, insurance companies, investment funds, pension funds, mutual funds, as well as some non-financial institutions, and their motivation are different. Since 2005, the CRT market presents the following characteristics:underlying asset is increasing and products are complex; market participants are diversified and global; hedge funds becomes an important participant.Chapter 3 analyzes the potential risks of CRT market, microcosmic and macroscopical impact mechanism of CRT on financial stability. The microcosmic impact mechanism includes information asymmetry and individual banks' behavior. From a macro perspective, the mechanism consists financial supervision, financial markets, monetary policy and the risk contagion. This chapter also builds the banking industry equilibrium model to test the influence of CRT market on the financial stability based on information asymmetry. The results show that:an ideal CRT improving the bank's risk-taking ability and the overall welfare of market participants is conducive to financial stability. Asymmetric information problem exists the reality of CRT market, directly leads to the decline in loan quality and fierce competition, thus has the adverse effects to financial stability.Chapter 4 takes the European CRT market as a research sample, describes the financial system stability using Coexceedances. In addition to describe the relationship between CDO issuance and the financial stability through generalized linear mixed model, this chapter further build a dynamic system model in order to analyze the impact of lagged variables and trends variables, in which using the change amount of CDO as the system input variables and the Coexceedances as the system output variables. The results show that CRT on financial stability is significant, the impact of CDO issuance on the Coexceedances of negative returns is greater than on the positive returns.Chapter 5 analyzes the U.S. sub-prime crisis based on the impact of CRT. Sub-prime crisis is essentially the credit crisis. It has exposed the shortage of U.S. CRT market:weak subprime origination standards, the role of credit rating agencies, liquidity risk and the role of monoline financial guarantors. Before the outbreak of the sub-prime crisis, the potential risks and regulatory deficiencies led to the risk of excessive accumulation in CRT market; the risk contagion caused by default event deepened the crisis; CRT weakening the effect of monetary policy made the implementation of Government's aid policies more difficult.Chapter 6 describes the development, significance and obstacles of China's CRT market. In the perspective of financial stability, we need to focus on the following issues:the information gaps, insider trading, market infrastructure, effect on workouts and financial supervision. In practice, we should follow the principles:manage the leverage ratio of CRT products; strengthen information disclosure; CRT products derived from level to be an orderly way.In summary, the stable operation of CRT will help improve financial stability and efficiency. The main problem of CRT is asymmetric information and regulatory inefficiencies, which will give a negative impact on financial stability. Also, the CRT also lead to close relations in financial institutions and markets, which will magnify the financial shock. In addition, CRT weakening monetary policy has increased the difficulty of government economic policy. Therefore, the objective of policy is to improve and promote the development of CRT market, rather than limit it. Based on the above findings, the possible aspects of innovation of this dissertation are followed:Firstly, it selects a relatively new research perspective and builds a systematic and comprehensive theoretical analysis framework.Secondly, it establishes the equilibrium model based on information asymmetry to test the effect of CRT market on financial stability.Finally, Describe the risks of the financial system by use of Coexceedances, and build dynamic system model to analyze the impact of CDO lagged variables and trends variables on financial stability. The dynamic system model not only cover the latent macro-economic factors, but also effectively distinguish the impact of CDO lagged variables on financial stability.