Credit Risk Transfer, Financial Innovation, and Financial Instability (Innovazione Finanziaria e Instabilità: Il Trasferimento Del Rischio di Credito)
Studi e Note di Economia, Anno XVI, No. 3, pp. 339-382, 2011
46 Pages Posted: 24 May 2012 Last revised: 6 Jun 2012
Date Written: September 1, 2011
This paper aims to point out the role of credit risk transfer market in the financial system. The advent of a credit risk market has profoundly altered the role of banking firms into one of asset originator and asset distributor rather than the asset holder. The traditional economics of banking has changed in an important way and the new business model has evolved as a result of financial innovation. The main results of the paper are that the lending process disintegration and the development of the credit risk transfer market represent a key element in the recent financial crisis. Incentive structures faced by various agents in the financial intermediation chain also became dysfunctional. Banks became more focused on shareholder value strategies. It has created incentives to excess risk-taking behavior with adverse selection and moral hazard problems. All of these aspects of financial innovation have contributed negatively to efficiency and stability in the financial system.
Note: Downloadable document is in Italian.
Keywords: credit risk, risk transfer, financial innovation, lending, financial crisis
JEL Classification: G01, G21, G24, G32
Suggested Citation: Suggested Citation