Article

Quantitative Aspects of the collapse of the parallel banking system

Alexander Batchvarov

in The Oxford Handbook of Credit Derivatives

Published in print January 2011 | ISBN: 9780199546787
Published online September 2012 | | DOI: http://dx.doi.org/10.1093/oxfordhb/9780199546787.013.0016

Series: Oxford Handbooks in Finance

 Quantitative Aspects of the collapse of the parallel banking system

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This article describes the rise and fall of the parallel banking system based on securitisation. In essence, the parallel banking system emerged as a result of de-regulation and disintermediation, and led to a period of very high and, in retrospect, unsustainable, leverage. Its development was facilitated by the creation of new financial instruments (notably credit default swaps and collateralised debt obligations). Instead of keeping loans on their books, banks and other financial players were originating them, bundling them together, slicing into tranches, and selling these tranches to other investors, such as pension funds, insurers, etc., with different and complementary risk appetites. While this system supported the real economy for a long time – especially consumer, real estate, and leveraged finance – it contributed to the build-up of leverage in the global capital markets and subsequent worldwide crisis.

Keywords: parallel banking system; securitisation; credit default swaps; collateralised debt obligations; risk management; leverage; capital markets

Article.  11059 words. 

Subjects: Economics ; Financial Markets ; Econometric and Statistical Methods and Methodology: General

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