Credit Risks

The emergence of the last global financial crisis can be attributed to the poor incentive for banks to carefully select borrowers and their monitoring. This is due to the fact that US banks in particular resold large volumes of loans immediately after they were granted in the form of asset-backed securities (ABS) without participating in subsequent loan defaults. The other market participants did not sufficiently anticipate these disincentives from the banks. In particular, many investors have relied on the judgement of rating agencies and have not executed their own risk analyses. An important regulatory measure, introduced in the wake of the financial crisis, was the introduction of a mandatory risk deductible to alleviate the incentive problem. Against this background, the Institute of Finance researches, how the design of the deductible can optimally resolve the trade-off between the granting of incentives on the one hand and risk transfer on the other hand.  In addition, the Institute of Finance investigates how banks can accurately estimate and assess borrowers' default risks (e.g. in the form of the loss given default) before granting a loan.