Joint Forum paper on credit risk transfer

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14 Apr 2008

The Joint Forum – a consortium of the Basel Committee, IOSCO, and IAIS – has published a paper on Credit Risk Transfer (CRT) – Developments from 2005 to 2007.

Here is the Press Release (PDF 30k). The paper updates a 2005 paper to reflect the continued growth and rapid innovation in the CRT markets. The main findings of the paper are:
  • Some of the more complex CRT instruments developed since 2004 are associated with increased leverage and a high variance of loss or high vulnerability to the business cycle.
  • A failure to understand some of these risks contributed to the market turmoil of 2007.
  • Despite these shortcomings, the structured credit market is likely to survive, but will remain weak for a period of time.
  • Supervisors remain concerned about several aspects of the CRT market: its complexity; valuation issues; liquidity, operational and reputational risks; and the broader effects of the growth of CRT. Supervisors believe that market participants must better understand the structure and risks of the CRT products in which they invest, as well as how the rating agencies assign ratings to specific instruments and what circumstances would lead them to downgrade ratings.
  • With continued innovation in the CRT markets, the effort and resources that firms and regulators will need to expend to properly understand these instruments increases significantly.
  • There are steps that the industry and regulatory community can take to enhance the robustness of their risk management and oversight of these products. The paper includes recommendations in this regard.

Click to view Credit Risk Transfer (CRT) – Developments from 2005 to 2007 (PDF 628k).


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