I doubt if all the counterparties for bank derivatives are that well scrutinized.
As I understand the issue, the biggest problem with derivatives abuse, is that most of them are traded in relatively unregulated markets outside of the US, or in private hedge funds.
Thus, they have much less stringent risk management procedures and/or institutional accountability. Which then leads to what you're describing with counter-party reliability coming into question.
If you are a US based issuer of a loan, and attempt distribute your risk on that loan through unreliable counter-party transactions, should that loan default, you may find your "risk assessment" drastically skewed by the unreliability of that counter-party (financial contagion). It's not that you didn't have proper risk management procedures, but more of the scenario where you find the counter-party has "cooked their books" and should never have been a counter-party in the first place.
In these situations the Fed then steps in and provide liquidity until you ARE able to find a worthy counter-party willing to take on the risk (usually at a generous and very profitable discount to the original face value).
But again, this can happen in any kind of financial system, even one backed by gold, if risk managment and diversification of counter-parties proves inadequate.
Btw, have you notice why most of the larger re-insurers are based outside of the US? Their must be a pretty good reason for that, and is probably in the form of less regulation, which equates to greater profits (so long as they don't become the victim of "event risk" like September 11th).
Hawk |
