Research On Credit Risks Of Credit ABS

Asset-backed Securitization arose in 1970s' America,by the guide of policies that advocate “revitalizing stock assets,utilizing the incremental”,ABS in China has been growing rapidly,attracting more and more investors for the lock-in of its source of repayment and high rates.That the market size of ABS has soared helps build a hierarchic capital market in which direct financing plays a bigger role.Despite all the source of repayment it may have,ABS is pan-derivatives and not without risks derived from the uncertainty of its underlying assets.After all,ABS was one of the notorious culprits of 2007's financial crisis,along with the weak and unthorough supervision.So,we should emphasize on the importance of recognizing and quantifying credit risks that come along with ABS properly,while we are vigorously advancing its development and standardizing its undertaking.This article is divided into 6 parts.Part 1 recalls some of the related articles that analyze credit risks of ABS,and reintroduces the core results of those articles in the background of China's economic development.On the basis of independent supervisions and markets,Part 2 analyzes the credit risks as well as credit enhancements of ABS,Credit-ABS in particular,which is not supervised by the CSRC,by comparing it to other sorts of securitization.Part 3 introduces frequently-used methods for evaluating credit risk and based on the pros and cons of each method or model,modified KMV model is chosen as the most suitable risk analyzing model to be used in this article.Part 4 introduces the case that we intend to elaborate on,including its structure,sources of risk,credit enhancements and so on,for readers to better understand the analysis and conclusion.Part 5 treats the case with an empirical approach,for example,deciding if the underlying assets should be derecognized by dwelling on the financials.Then,by combining Monte Carlo Simulation and adjusted KMV model in a proper fashion,this article tries to find out the best issuing amount of Credit ABS,in order to contain the risks thereof and maintain the financing function.Last of all,conclusion and policy suggestions.This article selects a major financial tool,Credit ABS,and analyzes the risks of it by dissecting a successfully-issued project and quantifying default rates and other credit risk indicators,then finds out the best issuing amount and thus reduces credit risk to a presumably low level and maintain the financing function.The innovation of this article is that it combines Monte-Carlo simulation and adjusted KMV model and,bypassing the limits of theoretical analysis,examines the relations amongst the default rate of underlying assets,issuing amount and the default rate of asset-backed securities.This article may be helpful in setting up a new paradigm of undertaking an ABS project,along with the precaution measures,especially when low-degree assets can be securitized so that the issuing amounts are not always equal to the assets' principal amount as they are now,and it may also shed some light on managing and recognizing credit risks of innovative financial tools in our country.