The Design and Risk Management of Structured Finance Vehicles

Sanjiv Das and Seoyoung Kim
Additional contact information
Sanjiv Das: Leavey School of Business, Santa Clara University, Lucas Hall, 500, El Camino Real, Santa Clara, CA 95053, USA
Seoyoung Kim: Leavey School of Business, Santa Clara University, Lucas Hall, 500, El Camino Real, Santa Clara, CA 95053, USA

JRFM, 2016, vol. 9, issue 4, 1-21

Abstract: Special investment vehicles (SIVs), extremely popular financial structures for the creation of highly-rated tranched securities, experienced spectacular demise in the 2007-2008 financial crisis. These financial vehicles epitomize the shadow banking sector, characterized by high leverage, undiversified asset pools, and long-dated assets supported by short-term debt, thus bearing material rollover risk on their liabilities which led to defeasance. This paper models these vehicles, and shows that imposing leverage risk control triggers can be optimal for all capital providers, though they may not always be appropriate. The efficacy of these risk controls varies depending on anticipated asset volatility and fire-sale discounts on defeasance. Despite risk management controls, we show that a high failure rate is inherent in the design of these vehicles, and may be mitigated to some extent by including contingent capital provisions in the ex-ante covenants. Post the recent subprime financial crisis, we inform the creation of safer SIVs in structured finance, and propose avenues of mitigating risks faced by senior debt through deleveraging policies in the form of leverage risk controls and contingent capital.

Keywords: special investment vehicle; structured finance; leverage risk controls; contingent capital (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1911-8074/9/4/12/pdf (application/pdf)
https://www.mdpi.com/1911-8074/9/4/12/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:9:y:2016:i:4:p:12-:d:81673

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().