CDSs: lubricant or landmine?

Credit default swaps have allowed banks and investors to improve the management of their credit risk, but they may represent a lurking source of contagion in a crisis, argues David Rowe

When default swaps (CDSs) were introduced in the early 1990s, they offered banks a valuable new tool for managing credit risk. In an era when banks tended to originate and hold credit risk, portfolios largely reflected the lender’s regional footprints, and industry and credit-assessment expertise developed to deal with the characteristics of locally active firms. While a modest market in whole loans did exist, and syndication of large loans was a well-established practice, banks still found it