ECB González-Páramo: some reflections on the future of the market for credit derivatives.
10 September 2009
At the 30th International Bürgenstock Meeting the Executive Board member remarked that in the future more cooperation between market participants and public authorities is needed to jointly address market shortcomings for credit deriva
He remarked that for central banks the development of CDS market is of interest not least because of the following three reasons:
- first, central banks as key contributors to macroprudential supervision are conscious that CDS, as any OTC derivatives, have to be reflected adequately in the regulatory framework;
- second, and also in their supervisory role, central banks have been attentive to the implications of the enormous size of the created exposures;
- third, financial innovation affects the transmission mechanism of monetary policy and is therefore relevant to the central banks’ core task of conducting monetary policy.
From the investors’ point of view credit derivatives represent an asset class that allows investors to assume risks in exchange for a corresponding remuneration that suits their investment profile. At the same time banks use credit risk transfer instruments, including securitisation, to distribute lending-related credit risk exposures to such investors. However, the development of the market for credit derivatives also embodies features affecting the balance of risks of the different actors in the financial landscape.
He concluded by saying that “The financial crisis revealed that certain risks that credit products were expected to transfer away from banks and spread across the economies, had never really left the confines of the banking sector and that returns that previously appeared generous had overshadowed risks being taken. In the future, more cooperation between market participants and public authorities is needed to jointly address certain shortcomings of the markets for credit derivatives.”
© ECB - European Central Bank
