Asia Risk 15: Credit derivatives perform vital role but at heavy cost

The emergence of credit risk mitigation techniques has enabled banks to continue lending while easing their concentration risks. But this has come at a heavy cost, as investors in many complex, leveraged synthetic structures discovered following the collapse of the US subprime market in 2007. Hardeep Dhillon reports

In the early- to mid-1990s, Asian banks predominantly housed the credit risk of counterparties by holding loans on their balance sheets. But the 1994 Latin American debt crisis prompted a shift in Asian debt markets. Banks began to unload credit risk through tradable instruments, such as bonds and floating rate notes, says Simon Chiu, Hong Kong-based head of credit flow trading for Asia including Japan at BNP Paribas. “This also encouraged the advent of a credit default swap (CDS) market in Asia