CREDIT RISK - Global Money Markets

Asset-backed securities (ABS) expose investors to credit risk. The three nationally recognized statistical rating organizations rate asset-backed securities. In analyzing credit risk, all three rating companies focus on similar areas of analysis: (1) credit quality of the collateral, (2) the quality of the seller/servicer, (3) cash flow stress and payment structure, and (4) legal structure.

The credit enhancements—internal and external—that were described in the previous section for nonagency CMOs are also used for all ABS products. The amount of enhancement necessary to obtain a specific rating for each tranche in an ABS deal is determined by a rating agency after analysis of the collateral and the structure.

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