Theoretical And Methodological Controversies About Financial Innovation In The Function Of Credit Risk Transfer
Theoretical And Methodological Controversies About Financial Innovation In The Function Of Credit Risk Transfer

Summary/Abstract: Loan sale, securitization, and credit derivatives provide banks with greater opportunities to manage credit risk by transferring it to investors who are willing to take it. However, implementation of these financial innovations is accompanied by certain theoretical and methodological controversies about their effectiveness. Trading in credit risk enables its easier diversification to numerous market participants, but it can also reduce the value of mediation and increase the risk in the banking sector. Progressive development of the securitization technique, as well as the market of credit derivatives, stimulated by the boom in the U.S. subprime mortgage market in 2007, has escalated into a financial crisis of global proportions. Such developments pointed to the hidden dangers of the concept of credit risk transfer that may materialize as a loss of market participants in an environment that encourages excessive risk taking.

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