Editor's letter

The bank is a big issuer of structured products and has spent all year reminding everyone of its double A credit rating. Which is fine, but credit ratings, as is always the case in a crisis, have been discredited as an assessment of the credit risk that investors take on when buying a product issued by the bank.

If you cannot rely on credit ratings, you must look elsewhere. For BNP, you can see it is a stable, safe issuer as its CDS rate has hovered around the 50 basis-point mark for most of this year. To put that into CDS-speak, in the last week of November, the US government CDS rate was a few basis points under 50bp, while the level for the UK roamed around 100bp.

As a market level, the CDS rate offers benefits that a credit rating does not, which is a perspective from the people who have to buy and sell the paper.

Sounds perfect, right? So there has to be a catch, and there is. For one thing, while credit ratings do not incorporate a view of market risk, a CDS is a tool frequently used for trading and, as such, it offers no fundamental financial information about a credit - such as the levels at which dividends have been paid, what the profit is, what the gearing is, and so on.

The second, most pertinent, drawback is that the CDS concept doesn't translate easily to distributors and investors. They say they have heard of the idea, but are liable to phone back and ask what it is exactly. The hope must be that this is only because the concept is new to them. If that isn't the case, then all those bankers whiling away the hours trying to think of a cunning way to explain credit risk really are wasting their time.

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