Handbook of International Banking
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Handbook of International Banking

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Edited by Andrew W. Mullineux and Victor Murinde

The Handbook of International Banking provides a clearly accessible source of reference material, covering the main developments that reveal how the internationalization and globalization of banking have developed over recent decades to the present, and analyses the creation of a new global financial architecture.
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Chapter 3: Asset-backed Securitization, Collateralized Loan Obligations and Credit Derivatives

Warrick Ward and Simon Wolfe

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3. Asset-backed securitization, collateralized loan obligations and credit derivatives Warrick Ward and Simon Wolfe 1 INTRODUCTION Asset-backed securitization (ABS) can be defined as a process that enables the transformation of illiquid assets into liquid assets (marketable securities) that are sold in the securities markets. Through this process banks can now liquidate assets that were traditionally held on balance sheet until maturity. The set of assets that can be securitized is infinite, for example, residential or commercial mortgages, personal loans, corporate loans, car loans, credit card receivables, aircraft lease receivables, debt obligations, tax receivables, student loans, music receivables and intellectual property rights. The term ‘securitization’ is also used to describe the process of disintermediation in the banking sector. This is the continuing loss of banks’ prime customers to the securities markets where companies are able to raise capital at more competitive rates than the interest charged by banks for loans (see Berlin, 1992). However, in this chapter we shall be focusing only on ABS. The objectives of this chapter are twofold. Initially we shall analyse and chart recent trends in the ABS market, specifically focusing on the securitizing of banks’ assets – collateralized loan obligations (CLOs). Moreover, we analyse recent innovations in CLO deals, such as the use of credit derivatives. The use of such financial instruments is designed to manage credit risk, and generate payoffs or protection based on an underlying risky debt reference. Second, we shall analyse the regulatory environment surrounding ABS. The focus of our...

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