21
Sep

The need of a regulated credit derivative market:

Escrito el 21 Septiembre 2007 por Juan Toro en Financial Markets

Beginning of this year there were two main disequilibrium challenging the international financial stability: one was the US current account deficit and the second one was the growth of credit derivatives. From April this year, we started seeing the dangers of the former that exploded during August in the form of the mortgage sub prime crisis. The sub prime crisis is just a focal point in a wider problem, the growth of unregulated credit derivatives. Credit derivatives had been praised buy many (among them Alan Grenspan) and it truly has its virtues if credit risk is really diversified. But what we have seen recently is that this diversification has not worked out effectively and most of the credit risk is turning back into the books of their initial originators, the banks. Central Banks are trying to weather the storm, either through smoothing the reassessment of risk taking place (through liquidity injections) or by altering their long-term policy views and lowering the reference rates (as it has happened in the US). Once the turmoil is over, government and Central Banks should turn their eyes to the true root of the problem: the lack of regulation and information on credit derivative origination.

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