Risk reallocation

The originate-and-distribute model offered a means for banks to offload credit risk from their balance sheets and distribute it to investors. But Andrew Haldane and Lewis Webber of the Bank of England argue this risk was often passed on to those least able to manage it

Over the past decade, markets for credit risk transfer have grown exponentially. One consequence is that there has been a significant reallocation of risk within the financial system from the core banking institutions to various non-bank financial entities. Within the credit default swap (CDS) market alone, there was $3 trillion of net credit exposure transferred out of the banking system in 2006, with the main counterparties being insurance companies ($2.2 trillion) and hedge funds ($800

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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