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The traditional view of financial stability concentrates analytical efforts on the identification of increasing vulnerabilties prior to stress from individual failure in institutions, markets and infrastructure, assuming that the financial system is in equilibrium and adjusts when it experiences a shock. As opposed to this conventional approach, the presence of systemic vulnerabilties warrant the monitoring of ongoing developments in evolving areas of financial markets where the impact of unsustainable imbalances on financial stability is deemed most severe and widespread but difficult to measure, leave alone forecast. Given the increasing sophistication of financial products, the diversity and global reach of financial institutions, as well as the growing interdependence of financial markets and services, such areas exposed to extreme scenarios are likely to be found in financial innovation, where market forces and participants are left to their own devices and when complex incentive structures encourage greater risk taking in a benign economic environment but entail more adverse economic consequences when stress occurs.
The aim of this paper is to define the structured finance in order to point out to its possibilities in capital costs reduction and efficient refinance, as well as credit risk transfer through credit derivatives and securitisation transactions.
Keywords: structured finance; credit risk transfer; asset-backed securitisation (ABS); securitisation; mortgage-backed securitisation (MBS); collateralised debt obligation (CDO).