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Strategies & Market Trends : Steve's Channelling Thread

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To: Steve Lee who started this subject	6/25/2001 1:46:24 AM
From: Alex MG	of 30051

BoE issues derivative warning By John Willman, Banking Editor Published: June 24 2001 17:03GMT \| Last Updated: June 24 2001 22:09GMT The Bank of England has warned that the fast-growing credit derivatives market could concentrate risk in ways hidden from regulators, posing a threat to the stability of the few international financial institutions that dominate the market. In its half-yearly financial stability review to be published on Thursday, the UK central bank will say that a weakening global economy could test the banks, securities houses and insurers involved in credit derivatives. The Bank will also publish research showing the cost of banking crises to be larger than previously thought, with the subsequent loss of output amounting to between 15 and 20 per cent of GDP. The research also shows it takes much longer for developed economies to recover from the after-effects than emerging markets where the greater scale of banking crises forces much quicker responses. The Bank's review will say that the new derivatives which transfer credit risk between financial institutions have the potential to increase the overall robustness of the global financial system. But the market, which it estimates as approaching $1,000bn in the amount covered, is not yet fully mature and has yet to be tested during a slowdown. Several possible crunch points are identified in the review that could cause the transfer of risk arrangements to break down. These include the wording of the documents that underpin the transfers, particularly on pre-1999 trades. Some participants are worried about the willingness to pay off non-banking institutions taking on risk. Banks place a high priority on prompt settlement while insurers who are playing an increasing role in accepting risk place a greater emphasis on discouraging fraudulent claims. The Bank says derivatives can also make it harder for regulators to monitor credit risk as it passes from the banks that make the loans to institutions that accept it. And it warns that lenders may be slower to help in corporate and sovereign debt restructurings if they have sold the risk on through derivatives. It concludes that financial stability authorities need to track the redistribution of credit risk from banks to non-banks such as insurers.

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