Structured Finance, Risk Management, and the Recent Financial Crisis

Abstract

Structured finance is often mentioned as the main cause of the latest financial crisis. We argue that structured finance per se did not trigger the last financial crisis. The crisis was propagated around the world because of poor risk management such as agency problems in the securitization market, poor rating and pricing standards, rating agency incentives, lack of market transparency, the search for higher yields by top decision makers and the failure of regulators and central banks to understand the implications of the changing environment.

Keywords: structured finance, risk management, financial crisis, collateral debt obligation (CDO), asset back commercial paper (ABCP), rating, pricing, securitization, regulation of financial markets

JEL Classification: D81, D82, D86, E5, G01, G12, G14, G32, G33