STRUCTURING AND OFF-BALANCE SHEET FINANCING OF MORTGAGE CREDIT DERIVATIVES
PUUSKA, TEEMU (2009)
PUUSKA, TEEMU
2009
Yrityksen taloustiede, laskentatoimi - Accounting and Finance
Kauppa- ja hallintotieteiden tiedekunta - Faculty of Economics and Administration
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Hyväksymispäivämäärä
2009-06-04
Julkaisun pysyvä osoite on
https://urn.fi/urn:nbn:fi:uta-1-19871
https://urn.fi/urn:nbn:fi:uta-1-19871
Tiivistelmä
This paper describes investment banking of mortgage credit derivatives in terms of structuring and off-balance sheet financing. The benefits and risks are also studied. The study describes the particular mechanism of structuring mortgage into mortgage credit derivatives as well as off-balance sheet financing of the mortgage credit derivatives is examined. Mortgage derivatives, such as an asset-backed security (ABS) and more complex collateralized debt obligation (CDO) structures among others are a part of the structured finance and have particular features. High-risk mortgage loans are attractive assets as a part of these derivatives since the loans offer better yields than prime class mortgage. On the other hand, the risks are bigger and the risks remain through structuring and off-balance financing. The mechanism of structuring mortgage credit derivatives is described. Structuring involves many market participants and financial intermediaries. Underlying assets of these credit derivatives are certain mortgage loans. Many benefits are evolved including new sources of external finance, credit risk transfer, improved liquidity, increased trading volume, better profits and a chance to straighten the financial supply chain. The benefits of structuring mortgage credit derivatives appear similar to common benefits of structured finance and securitization. Risks and disadvantages occur as well as the mechanism of structuring mortgage credit derivatives is sub-ject to risks or disadvantages. The major risks or disadvantages are the lack of control, asymmetric information, the lack of transparency and disadvantages of credit risk transfer.
Off-balance sheet finance or financial activities outside of the balance sheet is understudied area although it has a salient role in mortgage derivatives banking. Off-balance sheet finance creates plenty of benefits that are a new source of external finance, improved profitability, new tools to attain new lines of business in the banking industry and a possibility to leverage. However, off-balance sheet finance is also a subject to increased risk in banking as it increases both risk of deposit, liquidity risk as well as risk of losses, it creates a possibility to leverage and off-balance sheet finance also increases financial risk. In addition, the significance of off-balance sheet finance is undisputable in the field of modern investment banking. Mortgage credit derivatives banking seems to offer benefits and expose risks or disadvantages similar to the aforementioned benefits and risks of structuring or off-balance sheet financing as such. Findings and conclusions are synthesis of previous research. As a whole, this study is an overview of mort-gage credit derivatives banking, and there are many avenues for future research.
Asiasanat:credit derivative, investment banking, structuring, off-balance sheet finance, mortgage, asset-backed security (ABS), collateralized debt obligation (CDO)
Off-balance sheet finance or financial activities outside of the balance sheet is understudied area although it has a salient role in mortgage derivatives banking. Off-balance sheet finance creates plenty of benefits that are a new source of external finance, improved profitability, new tools to attain new lines of business in the banking industry and a possibility to leverage. However, off-balance sheet finance is also a subject to increased risk in banking as it increases both risk of deposit, liquidity risk as well as risk of losses, it creates a possibility to leverage and off-balance sheet finance also increases financial risk. In addition, the significance of off-balance sheet finance is undisputable in the field of modern investment banking. Mortgage credit derivatives banking seems to offer benefits and expose risks or disadvantages similar to the aforementioned benefits and risks of structuring or off-balance sheet financing as such. Findings and conclusions are synthesis of previous research. As a whole, this study is an overview of mort-gage credit derivatives banking, and there are many avenues for future research.
Asiasanat:credit derivative, investment banking, structuring, off-balance sheet finance, mortgage, asset-backed security (ABS), collateralized debt obligation (CDO)