The Application Of CDS In SME Loan Securitization: Based On Multi-Bank Loan Pool

In order to solve the problem of small & medium enterprises (SME) financing, securitization and credit derivatives have been widely used to diversify and transfer SME credit risk. In additional, constructing optimal risk-return allocation contract between a bunch of small banks was proved to be an effective way to improve the efficiency during the process of securitization.This thesis is aimed to study the structure of CDO based on multibank loan pool, analyze how it can separate, transfer and diversify the credit risk of SME loans, how it can reduce the risk faced by banks, and also how it can reduce the extent of asymmetric information problem and cost. Specifically, this thesis analyzes the role of credit default swap (CDS) in this kind of CDO, especially its influence on participant banks'behavior. We can get such conclusion: CDS can lower the level of effort, a *, made by participant banks. However, this kind of efficiency loss can be compensated if we increase the parameterγ. Moreover, if the amount of banks is big enough, then the decrease in the level of effort made by banks will be trivial.In this thesis, 36 American companies'bond data and corresponding CDS data are collected. Using the data, we run a multiple variable regression and found the factors determining CDS price. The conclusion is CDS price is positively related with yield to maturity of the bond and the volatility of asset, which again, proved that the CDO based on multi bank loan pool could reduce the cost of securitization for SMEs.Finally, the thesis analyzed the risk of CDS market, and suggested how to solve it.