On thin ice

Counterparty Risk


Taking an aspirin is an easy way to treat a headache. The potential, unpleasant side-effects - heartburn, indigestion, nausea - are rarely considered. Similarly, when a bank has the headache of excess credit exposure, it often gulps down a credit default swap (CDS) without reading the warning on the side of the packet: credit derivatives can produce painful, unanticipated build-ups of counterparty risk.

That warning could be ignored with impunity while CDS counterparties - predominantly other ban