Introduction
The implications for financial stability of lightly regulated and
highly leveraged financial institutions such as hedge funds and
private equity funds, together with innovative financial products
such as derivatives and asset-backed securities, remain a subject
of controversy. This is particularly true in the current global
financial crisis, where issues of systemic risk have not only
national, but regional and global implications. The contributions
of these institutions and markets to the development and
worsening of the crisis suggest that they need to be monitored
and regulated more closely, but there is still disagreement about
the degree of regulation that is needed.
This policy brief examines hedge funds, private equity funds,
and innovative financial products, particularly collateralized
debt obligations and asset-backed securities, as the latter are at
the heart of the freeze up of various financial markets. What is
the overall structure of these products? What role did they play
in the development of the current global financial crisis? What
changes are needed in the global financial architecture related to
these institutions and products to strengthen financial stability
going forward?
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The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
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