On thin ice

Following the near-collapse of Bear Stearns, even trades conducted with interbank dealers can no longer be considered risk-free. With so much of the derivatives market concentrated in the hands of a few dealers, what would happen if a major counterparty were to go bust? What are banks doing to manage this risk? Duncan Wood reports

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Taking an aspirin is an easy way to treat a headache. The potential, unpleasant side-effects - heartburn, indigestion, nausea - are rarely considered. Similarly, when a bank has the headache of excess credit exposure, it often gulps down a credit default swap (CDS) without reading the warning on the side of the packet: credit derivatives can produce painful, unanticipated build-ups of counterparty risk.

That warning could be ignored with impunity while CDS counterparties - predominantly other

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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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