global financial stability report, april 2006 chapter ii. the.pdf

THE INFLUENCE OF CREDIT DERIVATIVE AND CHAPTER II STRUCTURED CREDIT MARKETS ON FINANCIAL STABILITY here is growing recognition that the potential for market disruptions. As such, dispersion of credit risk by banks to a these markets are subject to increased atten- broader and more diverse group of tion from supervisors and policymakers. Tinvestors, rather than warehousing While the credit derivative markets raise such risk on their balance sheets, has helped some supervisory concerns, the information to make the banking and overall financial sys- they provide is very useful for supervision tem more resilient.1 Over the last decade, new and market surveillance. First, by enhancing investors have entered the credit markets, the transparency of the market’s collective including the credit risk transfer markets. view of credit risk, similar to bond markets These new participants, with differing risk before them, credit derivatives provide valu- management and investment objectives able information about broad credit condi- (including other banks seeking portfolio tions, and increasingly set the marginal price diversification), help to mitigate and absorb of credit. Therefore, such activity improves shocks to the financial system, which in the market discipline. Second, supervisors and past affected primarily a few systemically other public authorities also may be able to