{"id":22655,"date":"2017-02-04T10:15:44","date_gmt":"2017-02-04T15:15:44","guid":{"rendered":"http:\/\/olduvai.ca\/?p=22655"},"modified":"2017-02-04T10:16:02","modified_gmt":"2017-02-04T15:16:02","slug":"meet-the-new-safe-synthetic-cdos-that-could-spell-disaster-for-the-european-banking-system","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=22655","title":{"rendered":"Meet The New, “Safe” Synthetic CDO’s That Could Spell Disaster For The European Banking System"},"content":{"rendered":"

Meet The New, “Safe” Synthetic CDO’s That Could Spell Disaster For The European Banking System<\/a><\/h3>\n
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So what do you do if you’re a European banking regulator faced with the task of maintaining a safe, sustainable financial system amid a concerning growth in bank leverage.\u00a0 Well, if you said sell down risk assets then you’re just being silly or completely ignoring your implicit obligation to engineer higher banking profitability at all costs.<\/div>\n
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If we can get serious for a moment, like in the early 2000’s, when all else fails you turn to synthetic CDO’s which, courtesy of some magical, if completely incomprehensible, math, slashes the risk of bank balance sheets while having a negligible impact on profitability.\u00a0 It’s called the Synthetic Collateralized Loan Obligation and it’s all the rage in Europe.<\/p>\n

Here’s how it works<\/a>:<\/p>\n

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In a synthetic securitisation a bank buys credit protection on a portfolio of loans from an investor.<\/strong>\u00a0This means that when a loan in the portfolio defaults, the investor reimburses the bank for the losses incurred on loans in that portfolio up to a maximum, which is the amount invested.\u00a0This amount therefore provides credit protection for a slice of the portfolio, which is often called the \u2018first loss tranche\u2019. The size of this tranche is typically chosen in a way to cover at least the expected losses on the portfolio as well as a share of unexpected losses.<\/strong>\u00a0The bank usually retains the rest of the risk, which is called the \u2018senior tranche\u2019.<\/div>\n

Before closing, the bank and the investor agree on the terms of the transaction, such as the amount the investor is at risk for, the duration of the contract and the loans that are eligible for inclusion in the portfolio.<\/p><\/blockquote>\n

…click on the above link to read the rest of the article…<\/p>\n<\/div>\n<\/section>\n","protected":false},"excerpt":{"rendered":"

Meet The New, “Safe” Synthetic CDO’s That Could Spell Disaster For The European Banking System So what do you do if you’re a European banking regulator faced with the task of maintaining a safe, sustainable financial system amid a concerning growth in bank leverage.\u00a0 Well, if you said sell down risk assets then you’re just […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[281,14753,14752,14754],"class_list":["post-22655","post","type-post","status-publish","format-standard","hentry","category-economics","tag-europe","tag-european-banking-system","tag-synthetic-cdos","tag-synthetic-collateralized-loan-obligation"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/22655","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=22655"}],"version-history":[{"count":2,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/22655\/revisions"}],"predecessor-version":[{"id":22657,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/22655\/revisions\/22657"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=22655"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=22655"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=22655"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}