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Money and Banking Management

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Money and Banking Management
CHAPTER 9

RISK MANAGEMENT: ASSET-BACKED SECURITIES, LOAN SALES, CREDIT STANDBYS, AND CREDIT DERIVATIVES

Goal of This Chapter: The purpose of this chapter is to learn about some of the newer financial instruments that financial institutions have used in recent years to help reduce the risk exposure of their institutions and, in some cases, to aid in generating new sources of fee income and in raising new funds to make loans and investments.

Key Topics in This Chapter

• The Securitization Process • Securitization’s Impact and Risks • Sales of Loans: Nature and Risks • Standby Credits: Pricing and Risks • Credit Derivatives and CDOs - Benefits and Risks

Chapter Outline

I. Introduction
II. Securitizing Loans and Other Assets A. Nature of Securitization B. The Securitization Process C. Advantages of Securitization D. The Beginnings of Securitization – The Home Mortgage Market 1. Collateralized Mortgage Obligations – CMOs 2. Home Equity Loans 3. Loan-Backed Bonds E. Examples of Other Assets That Have Been Securitized F. The Impact of Securitization upon Lending Institutions G. Regulators’ Concerns about Securitization
Ill. Sales of Loans to Raise Funds and Reduce Risk A. Nature of Loan Sales B. Participation loan, Assignment loan and Loan Strip C. Reasons behind Loan Sales D. The Risks in Loan Sales
IV. Standby Credit Letters to Reduce the Risk of Nonpayment or Nonperformance A. The nature of standby letter of Credit (Contingent Obligations) B. Types of Standby Credit Letters C. Advantages of Standbys D. Reasons for Rapid Growth of Standbys E. The Structure of SLCs F. The Value and Pricing of Standby Letters G. Sources of Risk with Standbys H. Regulatory Concerns about SLCs I. Research Studies on Standbys,
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