Credit derivatives not yet helping banks' risk management, says S&P

Credit derivatives are not yet helping banks to hedge their risks, says a report from rating agency Standard & Poor’s.

Despite a rapid rise in innovation and trading activity in credit derivatives, the instruments have “a long way to go” before fulfilling their promise to become “a significant force in risk management for banks”, says the report by S&P’s credit analyst, Tanya Azarchs.

"As promising as the credit derivatives technology is, it is not yet a panacea for credit problems of banking systems around the world," said Azarchs. "It has not, as is commonly believed, helped banks avoid meaningful amounts of losses in the current credit cycle."

Azarchs says one reason is that most of the activity takes place between dealers, and does not involve end-users. S&P estimates that of the $3 trillion total notional amount of credit derivatives outstanding, only $100 billion represents transference of credit risk from banks’ lending and trading activities to other market participants.

Another reason is that most of the credit protection available is on the lowest-risk names. “This appears to have the effect of shifting the remaining risks in the banking system further towards the riskier, non-investment-grade range of the spectrum,” the report says.

Azarchs also says that for structured transactions, the risks are generally retained by banks.

The report warns that as credit derivatives take increasingly complex forms, they will pose challenges to accounting standards, regulators and analysts.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here