The Credit Risk Transfer Market and Stability Implications for U.K. Financial Institutions

Author/Editor:

Jorge A Chan-Lau ; Li L Ong

Publication Date:

June 1, 2006

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The increasing ability to trade credit risk in financial markets has facilitated its dispersion across the financial and other sectors. However, specific risks attached to credit risk transfer (CRT) instruments in a market with still-limited liquidity means that its rapid expansion may actually pose problems for financial sector stability in the event of a major negative shock to credit markets. This paper attempts to quantify the exposure of major U.K. financial groups to credit derivatives, by applying a vector autoregression (VAR) model to publicly available market prices. Our results indicate that use of credit derivatives does not pose a substantial threat to financial sector stability in the United Kingdom. Exposures across major financial institutions appear sufficiently diversified to limit the impact of any shock to the market, while major insurance companies are largely exposed to the "safer" senior tranches.

Series:

Working Paper No. 06/139

Subject:

English

Publication Date:

June 1, 2006

ISBN/ISSN:

9781451863994/1018-5941

Stock No:

WPIEA2006139

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

27

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