Collateralized Loan Obligations Essay Example | Topics and Well Written Essays - 1750 words

Collateralized Loan Obligations - Essay Example The shareholders look for the assets which give higher yield and the companies take benefit of low borrowing rates. Collateralized mortgage obligations are same as the overflow marketplace of the predetermined product world. Strong trade of obscure products have helped increase investor’s enthusiasm for leveraged mortgages just as the regulators are cautioning about potentially agitated credit markets (Financial times, 2014). The paper aims at providing the nature of collateralized loan obligations and their role during the time of financial crisis. It will also highlight the changes which has taken place in the regulations to prevent the re-occurring of crisis. Further, the reasons behind the latest growth in the collateralized loan obligations market have also been discussed. Bank are gradually more employing securitization structure of a novel asset known as collateralized loan obligation (CLO) in order to fulfil their financial goals. Collateralized loan obligations allow banks to sell part of huge portfolios of the commercial loans directly in the global capital markets. CLOs provide banks a way of attaining a broad choice of financial objectives, comprising the decrease of regulatory capital needs and requirements, access to a proficient funding base for lending activities, accounting treatment of off-balance sheet, as well as increased liquidity (Kohler, 1998). The rationale behind the formation of collateralized loan obligations was to augment the supply of keen business lenders in order to decrease the price of loans/mortgages to companies and to facilitate banks more frequently to instantly sell loans to the external lenders/investors. This will facilitate providing of money to the business clients and therefore earn price or fee with no risk or little risk towards themselves. A collateralized loan obligation is made of various high risk business loans which are grouped together and sliced into diverse sectors which carry dissimilar credit