by Robert Waldmann
My post on “what the hell are credit default swaps for” got lots of comments and I learned a lot from the comment thread.
I continue my effort at remedial education via blogging.
First a very simple article by Martin Hutchison
Does this guy know what he is writing about ?
Banking regulations and the lack of funding requirements for CDS: Banks are required by law to hold a certain amount of capital for loans they make – about 8 cents for every dollar in principle, but there are a number of loopholes that allow it to be less for certain types of loans. But there are very limited capital requirements for CDS, so banks and other CDS market participants can take on much more credit exposure through CDS than they could directly.
Oh my. So entities which are not allowed to invest in bonds other than high rated bonds can do that by buying credit default insurance from a firm which absolutely won’t be able to cover a wave of defaults. Craaaaaaazy
In my state of pure tabula rasa ignorance, I have been googling and I haven’t found anything on US regulation of CDSs. However, European banks warn that they won’t be able to keep up with US banks if they are regulated
SIFMA Global SmartBrief | 09/10/2008
The European Commission’s proposal to increase capital requirements on instruments, such as credit-default swaps, is facing heavy opposition from the financial industry. SIFMA and the European Securitisation Forum, an affiliate of SIFMA, were among a group of banks that issued a letter saying the plan’s “fundamental flaws” will hurt risk management and put a crimp on financing. “It will damage the competitiveness of Europe,” the groups said in a letter to Charlie McCreevy, European commissioner for internal market and services. Bloomberg (07/17)
Poor boring European banks can’t have all the modern with it US excitement. If that is a smart brief I sure don’t want to read their dumb briefs.
I am trying to find out what CDS exposure does to a firm’s credit rating.