NY Fed chief warns of credit derivatives risk

Speaking to the Global Association of Risk Professionals in New York today, Geithner said the over-the-counter derivatives market faced a collective action problem, with players unwilling to give up competitive advantage in order to improve risk management past industry norms.

The credit derivatives market, he said, presented a particular problem, with the same names showing up over and over in different types of instruments, amplifying the impact from a single default.

He also highlighted uncertainties in measuring the risk involved in credit derivatives, made worse by delays in trade processing - although he acknowledged that banks were working to reduce them.

Dealers must work to reduce delays further and improve their understanding of the risk involved in credit derivatives trading, he said, warning the industry had no experience in dealing with the pressures that the impending drop in credit quality would bring.