Have Pre-Crisis Levels of Risk Returned in U.S. Structured Products? Evidence from U.S. Subprime Auto ABS, CLOs, and Insurance-Linked Securities Markets

From 2011 through 2014, new issuance of U.S. structured products backed by subprime auto loans and leveraged corporate loans grew by 55% and 716%, respectively. The authors analyze the recent activity in these markets, as well as the activity and risks in the loan markets underlying auto asset-backe...

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Bibliographic Details
Published in:The journal of structured finance 2015-04, Vol.21 (1), p.10-44
Main Authors: Culp, Christopher L., Forrester, J. Paul
Format: Article
Language:English
Subjects:
Asset backed securities
Automobile loans
Captive finance
Collateral
Collateralized loan obligations
Finance companies
Loans
Market shares
Securities markets
Securities regulations
Structured products
Studies
Subprime lending
Underwriting
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Summary:From 2011 through 2014, new issuance of U.S. structured products backed by subprime auto loans and leveraged corporate loans grew by 55% and 716%, respectively. The authors analyze the recent activity in these markets, as well as the activity and risks in the loan markets underlying auto asset-backed securities (ABS) and collateralized loan obligations (CLOs). Despite the empirical evidence of higher risks in auto and leveraged loan collateral, the analysis does not indicate a commensurate increase in risks to investors in the structured products based on those loans. For a comparison, they review market activity and risk indicia in U.S. insurance-linked securities, which, unlike auto ABS and CLOs, serve a pure risk-transfer purpose and do not result in any significant extension of credit by investors to sponsors. The authors also consider the likely impacts of the Volcker Rule and Credit Risk Retention rule on U.S. structured product markets, and they conclude that the regulations are likely to stifle market activity and discourage legitimate risk transfer.
ISSN:1551-9783
2374-1325
DOI:10.3905/jsf.2015.21.1.010