Definition of structured debt securities

Structured debt securities are complex debt instruments created to meet needs that cannot be met from traditional financial instruments available in the markets.

Common examples include collateralised debt obligations (CDO) and asset backed securities (ABS). Structured debt securities have the potential to decrease risk, create liquidity, and increase yield, but they tend to have very high fees. [1]

There are also products that have fallen out of favour after their complexity and lack of transparency were blamed for infecting banks and other investors around the globe with losses from poor subprime mortgage underwriting. [2]

Subprime residential mortgages were issued to high-risk borrowers, such as those with a history of late payments or bankruptcy. A rash of defaults in the sector had shaken credit markets.

CDOs are vehicles that invest in leveraged loans and high-yield bonds and asset-backed securities. These pools of assets are sliced up into parts or tranches that carry different risks and then sold onto investors. [3]

German banks rein in exposure to Spain

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