Large Bank Examination Workshop February 2026

CDOs and the Credit Crisis • For this case study, we will focus on CDOs and the credit crisis.

• A CDO is a type of security in which the losses due to default on a pool of collateral (e.g. mortgage loans) is tranched .

• Each tranche offers a specific degree of loss protection, in that it is exposed to loss only once the cumulative losses on the pool have exhausted all of the tranches that are subordinated to it. • In aggregate, the tranches must have the same risk as the collateral pool. But different tranches based on the same collateral pool may have very different risk characteristics.

143

Attachment and Detachment Points

CDO Tranches

• Each tranche is defined by its attachment point and detachment point . • The equity tranche at left has attachment point 0% and detachment point 3%. • The mezzanine tranche has attachment point 3% and detachment point 6%.

22-100%

Super-Senior

12-22%

9-12%

Senior Senior

0-3% 3-6% 6-9%

Equity Mezzanine

144

72

© Global Financial Markets Institute Inc.