Cash vs synthetic CDOs

The attraction of synthetic CDOs for many banks is the ability to hive off risk to third parties whilst retaining ownership of the assets. Such is their popularity that three-quarters of new CDOs are synthetic

The distinction between cash and synthetic instruments is that while in a cash CDO assets are physically removed from a bank's balance sheet, in a synthetic transaction the risk is transferred to third-party investors, with the originating bank retaining the assets. The synthetic template has been a very appealing option for banks that are attracted by the regulatory capital benefits of removing loan risk from their balance sheets while retaining ownership, which may be a requirement for a