Financing Trusts: Causes of the Risks and Legal Regulations -Part 10

Aynsley Moore

Sep 27, 2021

(3) The potential expansion of credit risk: financial systemic risk

In today’s financial market, trust products closely link various financial institutions through investment. When the investee breaks out a credit risk event, it will be transmitted to the financial institution as the investment subject, affecting the stability of its operation and even inducing financial systemic risks. Since the source and investment of funds of intra-industry trusts and asset-backed securitization trusts involve multiple financial institutions, once the credit risk of the counterparty arises, it may cause financial systemic risks.

In intra-industry trusts, market risks influence more financial institutions. If the bank acts as a counterparty to the transaction, when it releases a large amount of off-balance-sheet assets, large-scale redemption problems will occur, which will not only cause losses to investors, but also affect the normal operation of the bank due to the liquidity risk, causing the bank’s own credit risk. Although the bank has a relatively low-cost fund pool, its other businesses will be affected one after another at this time, and the bank itself may also face bankruptcy. Trust companies related to banking business cannot be protected from risks because they simply serve as channels. Rather, the credit risk of the counterparty will affect the trust company and generate reputation risk and fiduciary accountability risk.

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