International Economics (Subject) / Macro Finance (Lesson)

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• key factors leading up to the housing bubble large capital inflows from abroad lax interest rate policy transformation of the banking sector
• Traditional Banking Model issuing banks hold loan until they are repaid
• "originate and distribute" banking model loans are pooled, tranched and then resold via securitization
• key features of the new banking model emergence of structured products increasing complexity shorter maturity perceived diversification overall, more risk taking and underestimation of risk
• Steps to create CDOs form diversified portfolios of mortgages and other types of loans, corporate bonds and other assets like credit card receivables, portfolio is transferred to a special purpose verhice (SPV) slice these portfolios into different tranches sell tranches to investor groups with different risk attitudes
• banking industry trends leading up to the liquidity squeeze securitization shorter maturity structure overnight repo market off-balance sheet vehicles

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