The Credit Risk Assessment and Its Contribution to the Global Financial Crisis

by Mostafa Hassan
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The Global Financial Crisis triggered in 2007 has its negative impact on the whole global economy. Many financial institutions have gone bankrupt. Many employees lost their jobs as a consequence therefore. Additionally, investors in the financial markets lost their money.

Indeed, the reasons for the financial crisis are multitude. However, it is submitted that the main reason that underpins the Crisis is the incorrect assessment of the risks associated with the financial instruments. As will be seen in the following chapters,such inappropriate assessments are partially because of the complexity of the current financial products and partially because of the dramatic fall in the house prices.

Although, the focus will be on the due diligence process and the credit rating process as they are the main elements of the credit risk assessment, reference will be made to the process of securitisation so as t be able to realise the context in which the said elements operate. The main emphasis of this paper will not be limited to the role of the due diligence process and the credit ratings in the Global Financial Crisis, rather it will be extended to examine how regulators restructured the rules related to these

elements as a response to the Crisis.

Accordingly, this dissertation will be divided into three chapters. The first chapter will be devoted to explain the basic components which, if combined, constitute the Global Financial Crisis. This will encompass an analytical comparison between corporate bonds and securitisation, a comparison which will be used later to acknowledge the role of the elements of the credit risk assessment in the financial crisis. The said comparison will also be useful to realise the complexity of the securitisation

transactions. This chapter will also define the due diligence process and credit rating and how they can effectively assess the credit risks and who is responsible for conducting each of them.

One the other hand, the second chapter will address how the inappropriate credit risk assessment, represented in these elements, contributed to the Global Financial Crisis.However, a brief history about the Crisis will be given in the beginning in order to link between this elements and the Crisis.

The third chapter will be dedicated to the initiatives taken by the regulators, especially in the EU and the US, to reconstruct the rules related to the due diligence process and the credit rating agencies in order to avoid further crisis. Also suggested reforms by scholars will be briefly mentioned.

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Mostafa Hassan
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