In this paper we present a critical viewpoint on interpretation of one of the most important innovation in the recent world economy. This is erivatives’ market, the options segment in particular. The standard options such as plain vanilla, nonstandard exotics or hybrid options and more recent specification called credit derivatives are actively traded around the world absorbing a significant volume of cash flows. The goal of the paper is to present the misunderstanding of the core problems in this field. This is an option price discovery. The modern probability and statistics theories are applied to provide investors and institutions information regarding the cost of the investment risk and on the other hand develop a better proximity between given historical data and analytical theory. We will show bellow that critical arguments are related to the basic fundamentals of the investment sciences that unfortunately are still difficult to comprehend by theoretical researchers, supervisory organizations, and investors.

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid tranche containing the concentrated credit risk, private information rent and the “excess spread” that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the residual tranche is about 3%, which reflects the size of the “market determined capital” necessary to support the liquefaction. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non-guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit-lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy-remote without sacrificing a bank’s traditional role as a financial intermediary.

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid tranche containing the concentrated credit risk, private information rent and the “excess spread” that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the residual tranche is about 3%, which reflects the size of the “market determined capital” necessary to support the liquefaction. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non-guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit-lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy-remote without sacrificing a bank’s traditional role as a financial intermediary.