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And secondly, they have driven among investors a ferocious search for yield – a desire among
==Index and Glossary==
investors who wish to invest in bond-like instruments to gain as much as possible spread above
There is an index to the topics dealt with in the economics articles [[Economics/Related Articles|here]], and a glossary of economic terms [[Economics/Glossary|here]].
the risk-free rate, to offset at least partially the declining risk-free rate. Twenty years ago a pension
 
fund or insurance company selling annuities could invest at 3.5% real yield to maturity on an
See also the [[Politics/Index|'''index to the politics articles ''']].
entirely risk-free basis; now it would be only 1.5%. So any products which appear to add 10, 20
 
or 30 basis points to that yield, without adding too much risk, have looked very attractive.
[[User:Nick_Gardner#Methodology|methodology]]
Financial market innovation
 
The demand for yield uplift, stimulated by macro-imbalances, has been met by a wave of financial
{|align="right" cellpadding="10" style="background-color:#FFFFCC; width:40%; border: 1px solid #aaa; margin:20px; font-size: 92%;"
innovation, focused on the origination, packaging, trading and distribution of securitised credit
|"''The European Union is something ...
instruments. Simple forms of securitised credit – corporate bonds – have existed for almost as long
very precious, not only for us in Europe, but also for the rest of the world. Because the European Union is, in fact, the result of a project for peace that brought together nations emerging from the ruins of the Second World War. It was the European Union that united them in peace around the values of respect for human dignity, freedom, democracy, justice, rule of law and respect for human rights.''"
as modern banking. In the US, securitised credit has played a major role in mortgage lending since
 
the creation of Fannie Mae in the 1930s and had been playing a steadily increasing role in the
:Merci Olsson, of Nobel Med, congratulating  President Barroso on the award of The Nobel Peace Prize t the European Union, 12 October 2012.
global financial system and in particular in the American financial system for a decade and a half
|}
before the mid-1990s. But from the mid-1990s the system entered explosive growth in both scale
and complexity:
• with huge growth in the value of the total stock of credit securities (Exhibit 1.5);
• an explosion in the complexity of the securities sold, with the growth of the alphabet soup of
structured credit products; and
• with the related explosion of the volume of credit derivatives, enabling investors and traders to
hedge underlying credit exposures, or to create synthetic credit exposures (Exhibit 1.6).
This financial innovation sought to satisfy the demand for yield uplift. It was predicated on the belief
that by slicing, structuring and hedging, it was possible to ‘create value’, offering investors combinations
of risk, return, and liquidity which were more attractive than those available from the direct
purchase of the underlying credit exposures. It resulted not only in massive growth in the importance
of securitised credit, but also in a profound change in the nature of the securitised credit model

Latest revision as of 03:28, 22 November 2023


The account of this former contributor was not re-activated after the server upgrade of March 2022.


Index and Glossary

There is an index to the topics dealt with in the economics articles here, and a glossary of economic terms here.

See also the index to the politics articles .

methodology

"The European Union is something ... 
very precious, not only for us in Europe, but also for the rest of the world. Because the European Union is, in fact, the result of a project for peace that brought together nations emerging from the ruins of the Second World War. It was the European Union that united them in peace around the values of respect for human dignity, freedom, democracy, justice, rule of law and respect for human rights."
Merci Olsson, of Nobel Med, congratulating President Barroso on the award of The Nobel Peace Prize t the European Union, 12 October 2012.
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