Cutting edge intro: CDOs and the risk of risk aversion

The failure, and the allure, of collateralised debt obligations (CDOs) is often pinned on the way they were rated and priced, which underestimated risk. However, new analysis shows the products to be more robust than is generally thought. Nazneen Sherif introduces this month’s technical articles


Collateralised debt obligations (CDOs) were once regarded as one of the brightest innovations in finance, giving issuers a way to buy protection on the underlying assets and offering investors a higher return than was available on other, similarly rated products. The party stopped abruptly in mid-2007, as ratings collapsed, defaults rose and liquidity vanished. Fingers immediately pointed at rating agencies and the quants who priced CDOs.

A lot of the blame centred on how banks and rating

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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