“Counterparty credit risk is an important risk – but it is one that banks have been in the business of managing for a long time,” says Arran Rowsell, a director in the credit trading group at Credit Suisse. He is correct, but it would be imprudent to presume that this experience will guarantee banks safe passage through the current downturn.
The financial markets are more complex and interlinked today than they ever have been and risk is concentrated between a smaller group of players. Since the last crisis, there has been a vast proliferation of highly engineered instruments and an attendant increase in the amount of bilateral exposure between banks due to the enormous growth of the over-the-counter (OTC) derivatives market.
