Sunday, December 26, 2004
Credit Derivatives Risks - From RiskCenter.com
December 22: Market Risk - Risks on Credit Derivatives Overextended
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Location: London
Author: Ellen J. Silverman
Date: Wednesday, December 22, 2004
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Insurance companies and commercial banks are taking on too much risk in the credit derivatives market, according to a quarterly report issued by international consulting firm, McKinsey & Company. The growing use of credit derivatives is transferring risk in ways that are mostly opaque to investors and regulators, the McKinsey analysts warned.
At a time of low yields, credit derivatives appeal to buyers who want to diversify risk or reduce their capital requirements and to sellers wanting to boost returns. The volume of outstanding contracts reached $3,600 billion in 2003 and is forecast by to rise to $10,000 billion in 2007.
The opaque nature of the credit derivatives market contrasts with the more mature market for interest rate derivatives where the risks are well understood and often closely linked to macroeconomic trends, for which information is widely available. Even so, when the interest rate derivatives market expanded in the early 1990s some companies suffered high-profile losses.
"Some players are pushing too aggressively into the market, distorting prices and raising the possibility that one company's large, unexpected losses could upset the entire system," the analysts said. The situation is unsettling because insurance companies do not face the rigorous capital requirements that the Basel capital accord imposes on banks. The authors called on insurers and banks to improve risk management skills and said the cost to a large global company of the software and IT needed to manage credit risk comprehensively could reach $50 million.
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Article Printed From RiskCenter.com
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Location: London
Author: Ellen J. Silverman
Date: Wednesday, December 22, 2004
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Insurance companies and commercial banks are taking on too much risk in the credit derivatives market, according to a quarterly report issued by international consulting firm, McKinsey & Company. The growing use of credit derivatives is transferring risk in ways that are mostly opaque to investors and regulators, the McKinsey analysts warned.
At a time of low yields, credit derivatives appeal to buyers who want to diversify risk or reduce their capital requirements and to sellers wanting to boost returns. The volume of outstanding contracts reached $3,600 billion in 2003 and is forecast by to rise to $10,000 billion in 2007.
The opaque nature of the credit derivatives market contrasts with the more mature market for interest rate derivatives where the risks are well understood and often closely linked to macroeconomic trends, for which information is widely available. Even so, when the interest rate derivatives market expanded in the early 1990s some companies suffered high-profile losses.
"Some players are pushing too aggressively into the market, distorting prices and raising the possibility that one company's large, unexpected losses could upset the entire system," the analysts said. The situation is unsettling because insurance companies do not face the rigorous capital requirements that the Basel capital accord imposes on banks. The authors called on insurers and banks to improve risk management skills and said the cost to a large global company of the software and IT needed to manage credit risk comprehensively could reach $50 million.
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Article Printed From RiskCenter.com
# posted by Tom @ 11:27 AM 
