Mixed signals

Credit quality remains a significant concern. In the fourth quarter of 2002, the signs were decidedly mixed, with enough good news to make the market hopeful, but not enough to solidly justify those hopes.

For example, at the end of November, Standard & Poor’s rolling 12-month US speculative-grade default rate had tumbled to 7.84%, while its EU counterpart had declined to 12.95%. The previous month, they were 8.38% and 13.19% respectively.

On the other hand, investment-grade defaults were up slightly in both regions for the same period. Similarly, S&P predicts that in 2002 the US speculative-grade default rate will have declined to 7–7.5%, from 9.77% in 2001. However, US investment-grade defaults will be up slightly, to 0.50%, from 0.40% in 2001.

As a result, credit risk measurement and management has continued to be a strong concern for banks around the world. The need to adopt portfolio-style techniques is being reinforced by Basel II. Canada’s banks, for example, are gearing up their credit risk departments by changing their policies, purchasing software packages and exploring the use of credit derivatives (view article).

A survey conducted by the International Association of Credit Portfolio Managers, the International Swaps and Derivatives Association and the Risk Management Association shows that, compared with two years ago, credit hedging practices have evolved substantially (view article).