CDSs: lubricant or landmine?


When default swaps (CDSs) were introduced in the early 1990s, they offered banks a valuable new tool for managing credit risk. In an era when banks tended to originate and hold credit risk, portfolios largely reflected the lender’s regional footprints, and industry and credit-assessment expertise developed to deal with the characteristics of locally active firms. While a modest market in whole loans did exist, and syndication of large loans was a well-established practice, banks still found it

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