Risk Modeling and Capital: Credit Risk (Securitizations)

Abstract

Most securitization deals like CDOs or CDOs squared are constructed in a complex way. The modeling is challenging. In the years of the CDO hype deals became ever more complex. Many smaller and medium-sized banks simply could not assess the risks associated with these deals. This lack of ability to assess the deals became a problem for many European and Asian banks that bought the tranches of CDOs issued by U.S. banks excessively. These banks neither had the tools nor the information to assess the associated risks. They largely relied on the judgment of the rating agencies. But as discussed in Sect. 3.9.2 even the rating agencies did not have all the information needed to assess the risks. They judged the deals with the help of questionable assumptions.