Credit Risk Transfer, Informed Markets, and Securitization

Museum & Gold Tour Regional Economy Data & Statistics Careers Blog Press Center

About the New York Fed
- About the New York Fed
- What We Do
- Governance
- Diversity and Inclusion
- Advisory Groups
- Events
- Vendor Information
- Working within the Federal Reserve System, the New York Fed implements monetary policy, supervises and regulates financial institutions and helps maintain the nation's payment systems.
  
  Do you have a Freedom of Information request? Learn how to submit it.
  
  See the world's largest accumulation of gold as you learn about the New York Fed and Federal Reserve System on a free tour.
  
  The latest Annual Report chronicles the impact of Federal Reserve policies and includes data on the New York Fed's operations.
Markets & Policy Implementation

Economic Research
- Economic Research
- Data & Indicators
- Publications
- PEOPLE
- Liberty Street Economics Blog
- Our economists engage in scholarly research and policy-oriented analysis on a wide range of important issues.
  
  The Weekly Economic Index provides an informative signal of the state of the U.S. economy based on high-frequency data reported daily or weekly.
  
  The Center for Microeconomic Data offers wide-ranging data and analysis on the finances and economic expectations of U.S. households.
  
  Our model produces a "nowcast" of GDP growth, incorporating a wide range of macroeconomic data as it becomes available.
Financial Institution Supervision
- Financial Institution Supervision
- Supervision & Regulation
  - Circulars
  - Regulations
- Reporting Forms & Instructions
  - Reporting Forms
  - Correspondence
- Bank Applications
- Consumer Protection
  - Community Reinvestment Act Exams
  - Frauds and Scams
- As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
  
  The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
  
  Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
  
  The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
Financial Services & Infrastructure
- Financial Services & Infrastructure
- Financial Services & Operations
- Financial Market Infrastructure & Reform
- The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
  
  The New York Fed provides a wide range of payment services for financial institutions and the U.S. government.
  
  The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
  
  The New York Fed has been working with tri-party repo market participants to make changes to improve the resiliency of the market to financial stress.
Outreach & Education
- Outreach & Education
- Community Development
- School & University Programs
  - High School
  - College and Graduate
- Museum & Learning Center
- Events
  - Upcoming Events
  - Past Events
- The New York Fed engages with individuals, households and businesses in the Second District and maintains an active dialogue in the region. The Bank gathers and shares regional economic intelligence to inform our community and policy makers, and promotes sound financial and economic decisions through community development and education programs.
  
  The Economic Inequality & Equitable Growth hub is a collection of research, analysis and convenings to help better understand economic inequality.
  
  The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
  
  The College Fed Challenge is a team competition for undergraduates inspired by the working of the Federal Open Market Committee.

Economic Policy Review

Credit Risk Transfer, Informed Markets, and Securitization

Volume 24, Number 3
December 2018

JEL classification: H81, G28, G01, G14

Author: Susan M. Wachter

Mortgage-backed securities (MBS) funded the U.S. housing bubble, while the ensuing bust resulted in systemic risk and the global financial crisis of 2007-09. In the run-up to the crisis, MBS pricing failed to reveal the growing credit risk. This article draws lessons from this failure that could inform the use of credit risk transfers (CRTs) to price credit risk. The author concludes that the CRT market, as currently constituted, could have appropriately priced and revealed credit risk during the bubble years because it met three key requirements: 1) transparency, through the full provision of information on the mortgages underlying the CRTs and the standardization of mortgages that arose from the predominance of Fannie Mae, Freddie Mac, and Ginnie Mae in the mortgage market; 2) open pricing in liquid markets; and 3) no counterparty risk. The author also describes areas of GSE reform that could either impair or enhance the ability of the CRT market to limit credit risk going forward, including the possible presence of multiple guarantors and the use of a common securitization platform.

Available only in PDF
Press Release

AUTHOR DISCLOSURE STATEMENT(S)

Susan M. Wachter
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.