Risk Annual Summit: DVA hedging creates systemic risk, says Brigo

Damiano Brigo

Banks that seek to hedge debit value adjustment (DVA) by selling credit default swap (CDS) protection on their peers are creating systemic risk, and the practice should be clamped down upon by regulators, according to Damiano Brigo, a professor of finance at King's College London.

Speaking at the Risk Annual Summit today, Brigo said a proxy hedge of this type may offset DVA variations in normal times, but a sudden default in the reference entity would mean the bank has to pay out on the CDS

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