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Outstanding structured finance securities in the U.S. amount to more than $7.3 trillion and represent more than 30% of the total outstandings in the U.S. bond markets. Because of the market's size and the complexity of the instruments, structured finance professionals increasingly specialize in narrow sectors or sub-sectors within the structured finance universe. In doing so, they can lose touch with the "big picture" and relationships of different sectors to each other. However, keeping the big picture in view is necessary for making strategic decisions in the areas of risk management and asset allocation.
Viewed over a recent five-year time horizon, the credit card ABS sector was the most placid one on the structured finance landscape. In contrast, CMBS was the area to experience the greatest adverse change, with declining credit support levels, weakening collateral performance, and contrary to what one might expect – tightening spreads. The residential MBS sector displayed moderately negative trends. Other sectors, such as home equity ABS and auto ABS displayed mixed results.
Emerging stock markets have recently been of great importance to the worldwide investment community. According to the International Finance Corporation (IFC), a subsidiary of the World Bank, all markets in developing countries are treated as emerging.
The World Bank defines developing countries to have per capita GNP below 7,620 U.S. dollars in 1990 prices. Under these definitions, the Istanbul Securities Exchange (ISE) is an emerging market of a developing country namely Turkey.
Emerging markets suffered from massive capital outflows during the 2008 global financial crisis. The spillover of the global financial crisis to emerging markets has varied according to the degree of their openness to the international capital markets and the structure of the financial system. Indeed, emerging countries with large exposure to international banks and capital markets faced challenges in rolling over their foreign currency debt. Among the emerging markets, in particular, the Korean financial markets were suffered much more damaged from captial outflows associated with financial deleveraging by international banks and foreign investors. Especially after the failure of Lehman Brothers, the rising concern about counterparty risk in addition to funding liquidity risk led to further dislocations in the Korean financial market.
Why has the Korean financial system been so vulnerable to the rollover risk of foreign currency debt? An immediate answer to this question is the high proportion of short-term foreign debt. For the past decade, the proportion of short-term foreign debt had sharply increased. The recent rise of short-term debt was mainly attributable to branches of foreign banks, but domestic banks faced the most severe shortages in the foreign currency liquidity. Thus, the high proportion of short-term foreign debt cannot fully account for Korea’s exceptionally vulnerable situation during the recent global financial crisis. Another possible answer may be the increasing interconectedness between banks which causes difficulties in rolling over liabilities spill over to the financial system as a whole. In order to detect the systemic linkages through which financial spillovers occur, it is necessary to look into the interbank foreign currency lending market in detail.
