Innovations in Credit Risk Transfer: Implications for Financial Stability
by Darrell Duffie of Stanford University
July 2, 2007
Abstract: Banks and other lenders often transfer credit risk in order to liberate capital for further loan intermediation. Beyond selling loans outright, lenders are increasingly active in the markets for syndicated loans, collateralized loan obligations (CLOs), credit default swaps, credit derivative product companies, "specialty finance companies," and other financial innovations designed for credit risk transfer. My purpose here is to explore the design, prevalence, and effectiveness of credit risk transfer. My focus will be the costs and benefits for the efficiency and stability of the financial system.