The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Banking

Structured finance risk: Spread too thin?

The real effects on the world's economy of an increasingly diverse CDO market.

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site In his recent Mansion House speech Mervyn King, the governor of the Bank of England, focused on some of the concerns surrounding investment in CDOs and the structural implications for the financial system of their increasing prevalence. Some of those concerns may be overplayed.

Historically, CDO-squared transactions have come in for the most criticism. These instruments pool together a portfolio of underlying CDO transactions in certain circumstances, magnifying the effects of a default that might be present in more than one of the underlying CDOs. This can create a precipice effect, because a single default can have a catastrophic effect on a CDO-squared transaction, multiplying loss to the structure. There has been criticism of lemming-like behaviour in the investor base where, in a low-spread environment, investors have sought to increase their returns by investing in these riskier portfolios. Concerns over CDO-squared transactions have been exacerbated recently because many deals have an exposure to CDOs of ABS linked to the US sub-prime market. However, most investors in these products are sophisticated, and do not rely simply on ratings, but conduct their own extensive review of the underlying portfolios, drilling down into all the underlying transactions to reach an informed assessment of the risk involved.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree