Credit derivatives may be a boom business for banks but the market as a whole has a problem: it is running out of risk takers.At first, insurance and reinsurance companies loaded up on risks that the banks were happy to offload. Then we had the Worldcom, Enron and Argentina crises and everyone marvelled at how big busts could go through the system without any serious disruption.
But maybe insurance companies have learnt their lesson and are being more careful about what they buy. Swiss Re, for one, has announced it is cutting back on exposures.
The search is on for new risk takers. There are some surprising candidates. “There are plans to establish a new Triple A institution that would do nothing else but take positions in credit derivatives,” says a senior New York banker.
Then there are corporates. Would some kind investment grade corporate like to sell a bit of protection to a bank with an oversize position? At present frankly, no, they have too many other things to worry about but they may be more keen in future (see article by Mark Pelham in this month’s FX & Treasury section).
A surprising source of buying power could be other banks. While banks are usually regarded as risk sellers, a Fitch Ratings report earlier this year on Global credit derivatives: Risk management or risk? discovered that 70% of European banks are actually net risk takers. “These include German Landesbanks that want exposure to major credits they may not have a relationship with,” says Matthew Cottrell, associate director of Fitch’s credit policy group.
The biggest players take on risk equivalent to 8% of their total balance sheet. Corporates, dedicated credit derivatives players and Landesbanks may keep the market moving even if insurance companies grow increasingly weary.
Brian Caplen
