Impact Study of the New Basel Capital Accord on the Instrumentations of the Collateralized Debt Obligation for Financial Institutions

THESIS ABSTRACT
GRADUATE INSTITUTE OF ACCOUNTING
NATIONAL TAIWAN UNIVERSITY

NAME: Marina Hao Wen HO JUNE, 2004
ADVISER：Professor Chen-en KO, Ph. D.

Topic： Impact Study of the New Basel Capital Accord on the Instrumentations of the Collateralized Debt Obligation for Financial Institutions

The Basel committee on Banking Supervision announced the International Convergence of Capital Measurement and Capital Standard (also known as Basel Capital Accord or BASEL I) which is intended to be a standard for bank operations and supervisions in 1988. Due to the rapid transformation of banking and financial market, the Basel committee drafted a new capital agreement – New Basel Capital Accord, also known as BASEL II in 1999. BASEL II allows financial institutions to select their best operation models under the accords of the credit risk, the market risk, and the operation risk. For the credit risk, the new Accord allows the institutions to utilize Credit Derivatives, Credit Default Swap and Total Return Swap, and Asset Securitization as the tools for credit risk mitigations.

Collateralized Debt Obligation (CDO) is one of the credit risk transfer (CRT) tools. This product has the properties of the Credit Default Swap, the Total Return Swap, and the Asset Securitization. It is our viewpoint that the study of CDO should be the key point for the study of credit risk mitigations in BASEL II. In this thesis, the definitions, variations, risks and returns, and credit valuations of CDO are discussed so that a framework of the product characteristics can be established. The current cases in Taiwan will be used as examples.

Other important issues such as the information disclosure, valuation models, standard documentations, and operation risks will also be discussed from the viewpoint of financial institutions and their supervisors. Finally, the impacts on the future financial environment from the credit risk mitigation tools are studied and hopefully can be used as a reference for the construction of the risk management systems.

Keywords：Basel Capital Accord or BASELⅠ、BASEL II、Credit Risk、Credit Derivatives、Credit Default Swap、Total Return Swap、Asset Securitization、Credit Risk Mitigation、Collateralized Debt Obligation、Credit Risk Transfer Instruments、Rating Companies、Rating Models。