Collateral damage

The practice of posting collateral against the risk of failed derivatives trades may protect dealers from the worst of the losses arising from Lehman's bankruptcy, says Joseph Pimbley. But what about trades that were not covered by such collateral agreements?

The bankruptcy of Lehman Brothers and the reports of derivatives dealer counterparties working through the preceding weekend to untangle the Gordian knot of thousands of Lehman trades have focused attention on the subject of counterparty credit risk. Though there are thousands of inter-dealer trades with billions of dollars of notional trade sizes, ultimate losses to dealers from Lehman's default should be minimal.

Substantial losses to dealers, though, have arisen from their transactions with

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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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