Structured Finance: Complexity, Risk and the Use of Ratings

Fender, Ingo; Mitchell, Janet

Download This Paper

Open PDF in Browser

Add Paper to My Library

Structured Finance: Complexity, Risk and the Use of Ratings

BIS Quarterly Review, June 2005

14 Pages Posted: 23 May 2012 Last revised: 29 Sep 2013

See all articles by Ingo Fender

Ingo Fender

Bank for International Settlements (BIS)

Janet Mitchell

National Bank of Belgium - Department of Financial Stability; Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: June 1, 2005

Abstract

This article reviews the principal features of structured finance instruments. Key to understanding the risk properties of these products is the evaluation of the risks associated with their contractual structure, in addition to the modelling of the credit risk of the underlying asset pools. It is argued that structured finance ratings, though useful, have intrinsic limitations in fully gauging the risk of these products, even as their complexity creates incentives to rely more heavily on ratings than for other rated securities. Market participants and public authorities need to take account of this in their assessments of structured finance instruments and their markets.

JEL Classification: G10, G20

Suggested Citation: Suggested Citation

Fender, Ingo and Mitchell, Janet, Structured Finance: Complexity, Risk and the Use of Ratings (June 1, 2005). BIS Quarterly Review, June 2005, Available at SSRN: https://ssrn.com/abstract=1884891