FRM Part II · FRM Exam Part II · Credit Risk
A bank wants to transfer the credit risk of a loan portfolio to investors while keeping the loans on its balance sheet and avoiding any need to sell the assets or notify borrowers. Which structure is most consistent with that goal?
A synthetic securitization using credit default swaps or credit-linked notes fits best. It moves the credit risk of the loans to investors while the bank retains legal ownership and the assets stay on its balance sheet, unlike a cash securitization, which requires a true sale of the loans to a special purpose vehicle.
- AA cash securitization with a true sale to an SPV
- BA synthetic securitization using credit default swaps or credit-linked notesCorrect
- CA covered bond funded by the originator's cash flows only
- DAn interest-only strip sale of loan coupons
Explanation
Synthetic securitization transfers credit risk through credit derivatives or credit-linked notes while legal ownership of the loans stays with the originator, so no true sale or borrower notification is needed. A cash securitization requires transferring the assets to an SPV. A covered bond and an IO strip do not transfer the portfolio's credit risk to investors in this way.
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