The philosophy behind credit charging is essentially identical to the thinking behind other market mechanisms commonly used today for addressing economic, social and environmental problems once managed through regulation.
Consider schemes to control polluting emissions: simple limits on emissions of monitored polluting facilities used in the last century are slowly giving way to carbon trading schemes designed to use the market for carbon credits to foster efficient ways of reducing emissions.
So is credit risk management destined to follow the path of carbon trading? Will a market for credit risk replace credit limits? What is the role of credit departments in this future world? In this paper, Dan Travers and Jean-Marc Schwob examine the scope of credit charging in the trading book, as well as the long term business and technological implications of the increased reliance on such a charge.
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