What is a loan commitment?
Collateralized loan obligation (CLO) is a financial process that combines loans to many different businesses into one package, which is then sold to more creditors. The aim is to streamline the financial system by overcoming the mismatch between the different needs of individual debtors and creditors. In some respects, however, duty increases complexity and was accused of contributing to the banking crisis that appeared in 2007.
strictly, the collateral loan obligation includes only commercial commercial loans. There are similar schemes that work in the same way using bonds and mortgages, and some combine two or more loans. The terms used for these schemes are often confused or used interchangeably. However, the basic system and advantages and disadvantages are the same in all cases.
You want to understand why the secured credit commitment has developed. Some creditors are happy to provide more risky loans because they can charge higher rates while others prefer loans with lowerrates, because they are more confidently repayment.
The financial industry believed that the loan market did not work as well as it could, because individual creditors had to find individual debtors who wanted the "right" type of loan. This could mean that all creditors were enough money to pay for all the necessary loans, but cash did not get where it was needed.
This led to the development of secured credit obligations. This system has many different existing loans, both risky and safe, together. The creditors then buy the rights to obtain the share of payments from all debtors. Each creditor gets a different level of payment depending on how much risk they take.
If any of the debtors participates in the borrowed loan obligation cannot repay its loan, the loss will be excluded from the share provided by the creditor who has accepted the largest RIZiko. Because more debtors fail, this creditor could end up with anything and then the remaining losses would pass to the creditor who took over the second highest level of risk, etc.
The biggest problem with a loan obligation is that it increases the complexity in the system and for large banks it is much harder to monitor how much risk they force. In some cases, rating groups were providing creditors how risky the investment is, marked the collateralized loan commitment as very safe, because some of the participating debtors are considered very good risks; These assessments do not take into account loans of medium or high -risk debtors.
Some people say that this confusion has allowed too many very risky loans to people who have failed to pay them since then. In some cases, the amount of money that was not paid off was in some cases the creditors who bought the "safest" shares of secured credit obligations were unexpectedly losing money.