CDO creative balance sheet risk management: Value creation?
The objective of the case is to discuss the development of asset-backed securities and collateralized debt obligations (CDO). Securitization has been a way to remove assets to shrink the bank’s balance sheet, as well as regulatory and economic capital. A special purpose vehicle (SPV) which was bankruptcy-remote was formed to acquire debt securities or bank loans. The debts were then repackaged, stratified and sold to investors. Synthetic securitization did not require a true sale of assets. Instead, a sponsor bank merely transferred the credit exposure to counterparty through a derivative agreement and the assets were still kept on the balance sheet.
What were the risks inherent in the securitization structure? How much value would be added? What has been the role of these balance sheet risk management strategies to help understand the banking crisis during the 2007-2008 credit crunch.
Royal Bank of Scotland
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