Inherent Fragility of Credit Risk Transfer Mechanism: Reflection on the Formation of Subprime Crisis

Economists have not yet reached unanimous agreement over the potential negative effects of CRT innovation. The author points out that there is conflict between risk sharing and incentive provision under information asymmetry. If innovations in risk transferring lead to excessive risk sharing, incentive structure of financial contract will be distorted, which may cause a series of negative influences on financial stability. Then the author analyses the role of CRT in subprime crisis, shows that CRT market has inherent fragility, and proposes improving directions of regulation.