1. RE-ENGINEERING FINANCIAL INSTITUTIONS & MARKET
1.1. Regulators
1.1.1. regulators recognizing the unintended risk-inducing consequences of some of the features of Basel I sought to amend the capital requirements.
1.2. Credit Ratings Agencies
1.2.1. Credit rating agencies are paid by issuers of securities to analyze risk and provide the results of their analysis to the general market in the form of ratings. credit rating agencies are exempt from fair disclosure laws (such as Regulation FD) that require all institutions to have the same access to material and forward-looking information.
1.3. Market Value Accounting
1.3.1. Banks have to write down the value of their assets to reflect their lower market valuations during the market decline.
2. STRATEGIES IN UNDERSTANDING CREDIT CRISIS
2.1. Securitization
2.1.1. Securitization involves a change in strategy from a traditional bank’s policy of holding the loans it originates on its balance sheet until maturity.
2.2. Loan Syndication
2.2.1. A loan is syndicated when a bank originates a commercial loan, but rather than holding the whole loan, the originating bank sells parts of the loan (or syndicates it) to outside investors.
2.3. Proprietary Investing
2.3.1. This has taken the form of an increased level of trading of securities within the bank’s portfolio—that is, buying and selling securities such as government bonds. In addition, banks established specialized off- balance-sheet vehicles and subsidiaries to engage in investments and
2.4. Credit Default Swaps
2.4.1. Credit derivatives such as CDSs allow banks and other financial institutions to alter the risk/return trade-off of a loan portfolio without having to sell or remove loans from the bank’s balance sheet.