A Study On Credit Risk Of Asset Securitization

As a widely-adopted financing method in international capital market, assetsecuritization facilitates in the improvement of capital structure, the enhancement ofliquidity and the risk transferring, yet its own credit risk avoidance has beenneglected meanwhile. With the outbreak of financial crisis, governments andscholars start to concentrate on the study of this problem. In2005, China initiatedthe financial innovation by introducing asset securitization. However, with therelative legal system and market mechanism to be improved, the operation andrunning procedure of it is under major credit risk. Thus factors that directlyconnected with the credit risk of government-led asset securitization in China’snational situation will be the main focus of this thesis.By systematic analysis of its substance, classification, mechanismestablishment and motives of development, as well as by summary and review of theprevious researches and theories, this thesis deconstructs the factors of credit risk inthe process of asset securitization. Also, the thesis summarizes the credit riskinfluencing factors by employing the bounded rationality theory in its comparativestudy between general environment and specific environment in China. Thosegeneral factors are: interest rate, information asymmetry, moral hazard of promoters’or rating-agencies’, dysfunctional system of supervision, fair value measurementand over-innovation of asset securitization products; while the specific factors arepolicy risk caused by government’s over-intervention in market and powerrent-seeking.Based on the case of “CCB2005-1”(the mortgage-backed securities issued byChina Construction Bank), the thesis conducts both normative analysis andempirical research on the unique macro factors generating credit risk inmortgage-backed securitization. Results indicates that government tools like interestrate control leads to borrowers’ converse option. Results also demonstrate currentdefault rate’s negative correlation with current interest rate and development of realestate industry, as well as its positive correlation with interest rate of next phase andinflation.From the perspective of government, specific suggestions are provided asfollow to avoid credit risk in asset securitization: to have a clear delineation of responsibilities between government and independent supervisory departments; tocultivate local rating-agencies on the framework of Basel’s credit rating system; toimprove personal credit consulting system and credit rating system; to incorporatenational macro-control policies into the system of credit risk management; and to getrid of information asymmetry by enhance its disclosure process.