A Research On Credit Risk Transfer Mechanism

With the gradual popularization of "originate and distribution" model of banks, the credit risk transfer market has experienced explosive growth and become the most glorious and favorite market in the world since late 90s in the last century. While since July 2007, deriving from the rapid credit risk accumulation of sub-prime mortgage stimulated by US residential real estate bubble, the sub-prime mortgage crisis broke out, and through the risk transfer and contagion in CRT market, the not-too-large loss in the sub-prime mortgage market has evolved into a systemic financial crises, which put many financial institutions into trouble and brought catastrophic shock to real economy. Thus the CRT market, which was crazily pursued by investors and expected as financial stability absorber before crisis while viewed as "mass destructive weapons" producer after crisis, is seriously impaired and doubted. Nevertheless, the initial trade of Chinese version "CDS" contract in the end of last year and declaims about developing ABS market from officials since 2011, both implies the reboot of Chinese CRT market from the almost "stop" stage.The paper proposes the "effective credit risk transfer and allocation model". Based on the model, the paper studies the micro-fulfilling mechanism of CRT and then probes the macro stability impact of CRT in order to answer the important question-how to play the role of "risk allocation and financial stability absorber" in avoid of systemic risk. The paper also discusses the development path of Chinese CRT market with frame of the model.The paper draws the following main conclusions:(1) The bank's capability of assuming risk is inherently limited owing to the inherent fragility of bank industry. Banks begin to implement "originate-distribution" model in order to get rid of the constraint of traditional credit risk management, and which means that banks originate loans and then distribute the accumulated risk.(2) The effective credit risk transfer and allocation model is assessed by "decreasing the bank risk and enforcing financial system stability" criteria and owes the following five features:decrease of individual bank risk and the safer of bank system; the better credit risk assumption of credit risk shift-in partner than the shift-out partner; the effective conquer and mitigating of agency problems; transparent information, efficient pricing and high liquidity in the market; the effective constraint mechanism against systemic risk.(3) Different CRT instruments have different features. By way of ABS, the bank intermediations transfer credit risk to ABS investors utilizing the function of portfolio of asset pool, the risk stripping of "real sell" and structure transfer of ABS process. As the main credit derivatives, CDS separate credit risk from other risks and effectively promote the liquidity and pricing efficiency of CRT markets. While CDS contracts also create new risk including documentation ris?counterparty default risk and settlement risk. Though CDO effectively diversified non-systemic risk, The anti-risk capability of CDO especially the high trenching CDO will rapidly slump and embodies the systemic fragility when facing systemic shocks.(4)Banks (including shadow bank system) actively trade in CRT market, urged by the goal of hedging credit risk, diversifying portfolio, optimizing capital utility and earning credit spread. The CRT activities of banks influence the risk property and scale of portfolio, capital scale, liquidity, profit and reputations, and imposes profound influence on firm financing and social welfare.(5)The CRT behaviors also bring about instability to bank and financial systems, and there are three type of argument in theory, "stability", "instability" and "uncertainty". The empirical test result support the "instability" argument, which means that though CRT behavior decrease the risk of individual bank while increase the systemic risk.(6) The traditional activity of insurance company has no possibilities of triggering systemic risk, which the CRT trading of it does has the possibility. The importance of hedge funds in CRT markets make them trigger systemic risk by two main channels:the one is the bank failure of a few large scale hedge funds (forced closing position) may induce the risk spreading in uncorrelated assets, the other is that hedge funds may lead to the huge loss of the financing banks, and impair real economy in the end.(7) The failure of "effective credit risk transfer and sharing" is the reason for break out of sub-prime mortgage crisis and substantive wreck. Substituting the former "micro-prudential regulation", the "micro-prudential regulation" comes out as the leading idea of global financial regulation.The history of international and lessons of CRT market indicate the clear path of Chinese CRT markets:developing simple CRT instruments and keeping away systemic risks.The point of innovation in the paper lies in:argument of "effective credit risk transfer and sharing"; the empirical analysis on the systemic risk impacted by CRT behavior; the trans-sector credit risk transfer; the design of Chinese CRT market based on "effective credit risk transfer and sharing model" and "keeping away from systemic risk".