II. Asset-backed securitisation--motivation and advantages of collateralised debt obligations (CDOs).

The development of CDOs is closely associated with imperfections in capital markets, the management of credit risk exposure, the acquisition of an alternative method of asset funding and the illiquidity of asset claims held by banks due to an inherent absence of transparency. While securitisation is not an omnipotent antidote to remedy all these shortcomings and frictions in capital markets, it serves as a flexible vehicle to mitigate the efficiency reducing effect of these factors through a creative application of structured finance via a reduction in regulatory capital or an improvement of asset liquidity. Otherwise, the presence of perfect information would render obsolete the benefits gained from CDOs as the administrative cost of structuring and marketing such a securitisation transaction would have no counterbalancing benefit.

These benefits from the securitisation of bonds and bank loans have resulted in different forms of CDO ...

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