Main Research - Credit Management, Credit Markets, CDO Project (Prof. Dr. Jan Pieter Krahnen)
- Dr. Christian Wilde
- Dr. Christian Hirsch
The lending business in Germany has often been characterized as as relationship based industry, in contrast to the arm's length-oriented lending relationships in anglosaxon countries. Before the start of the program, there was very little scientific evidence on the economics of the lending industry available. The CFS-research program on credit management, which was started in 1997, has made a serious attempt to fill this knowledge gap. Using first-hand credit file data from major commercial banks, savings banks and cooprative banks in Germany, it is analyzed how credit risks are typically being measured and managed in the banking sector. The research programme comprises projects on internal rating systems, on the economics of the German housebank, on bank behavior in corporate distress, and on several other aspects of the banking industry. Several conferences on the banking industry and on risk measurement and internal ratings have been organized to date.
The lending business in Germany and elsewhere is presently undergoing deep structural changes. In particular, financial institutions think about ways and means to free their balance sheet from credit assets. The advent of asset backed securities and collateralized loan obligations are widely seen as the start of a new era, an era where banks (as well as other financial institutions) originate loan-type assets, and trade away these financial claims. It is the intention of the CFS-research initiative on credit markets to analyze the economics behind these changes mainly through applied empirical work on contracting, pricing and market development.
More information at www.ifk-cfs.de/index.php?id=40
The CDO project addresses the economic rationale of credit (loan) securitization especially in a German and European context. Its results are expected to be of interest to both academics and practitioners alike. Over the recent past loan securitization - the substitution of credit finance by market-based finance - has developed into an efficient funding and capital management mechanism for financial institutions. Securitization transactions combine the asset pricing features of both securitised assets (generally mortgages and company loans) and fixed income securities. In a typical "asset-backed securitization (ABS)" structure, issuers repartition underlying cash flow proceeds from a diversified pool of individual claims into several tranches with varying risk sensitivity.
The project tackles the following questions, which arise from the way loan securitization is currently administered in Germany and Europe. First, how can loan securitisation be sustainable for financing small and medium sized enterprises if, at the same time, capital market-based financing is said to be too expensive? Second, to which extent do credit derivatives afford real credit risk transfer to other market agents and who are they ? Third, what happens to the stability of the financial system (esp. inter-bank claims) in the course of growing loan securitisation ? Answers to these questions will also provide valuable guidance for informed decision-making by regulatory authorities.
More information at www.ifk-cfs.de/index.php?id=761