The Effects of Innovative Instruments to Market Participants and the Financial System

2010 ◽  
pp. 204-220
Author(s):  
Demetres N. Subeniotis ◽  
Ioannis A. Tampakoudis
Keyword(s):  
Credit Risk ◽  
Financial Institutions ◽  
Portfolio Management ◽  
Credit Derivatives ◽  
Policy Makers ◽  
Market Participants ◽  
Financial Firms ◽  
Innovative Products ◽  
Risk Pricing ◽  
Credit Risk Pricing

Financial innovation triggered new ways in which financial institutions and corporates cope with credit risk since the advent of credit derivatives. A variety of new developed financial instruments, often complex products, offers significant advantages to market participants and its key players and in particular financial institutions. As statistics indicate, advanced computerization is by large the most important factor for the wide use of credit derivatives. More efficient loans portfolio management, further business expansion and confidentiality are the main benefits for banks. In addition, various non financial firms benefit from these tailor-made products. More importantly, credit derivatives are key elements of the financial systems’ stability, through increased liquidity, risk reallocation and credit risk pricing. Nevertheless, these innovative products are accompanied by significant considerations on behalf of users and policy makers. Out of which documentation, pricing, regulation and concentration are the central concerns. Market participants and regulators should face the challenges of credit derivatives market so as to boost the trouble-free intensive growth of these instruments.

Die Stabilität von Finanzmärkten:Wie kann die Wirtschaftspolitik Vertrauen schaffen?

2006 ◽  
Vol 55 (1) ◽  
Author(s):  
Theresia Theurl ◽  
Jan Pieter Krahnen ◽  
Thomas P. Gehrig
Keyword(s):  
Credit Risk ◽  
Financial Markets ◽  
Financial Market ◽  
Financial Institutions ◽  
Banking Sector ◽  
Public Awareness ◽  
Credit Derivatives ◽  
Point Of View ◽  
Regulatory Oversight ◽  
The Creation

AbstractFrom Theresia Theurl’s point of view financial markets exhibit certain features that turn them inherently unstable. Therefore, economic policy measures were necessary and advisable, but they should not take the shape of isolated and selected interventions. Rather, these measures of financial market supervision and regulation had to be integrated into a comprehensive concept of micro- and macroeconomic policy in order to allow the creation of stabilizing trust.In his contribution, Jan Pieter Krahnen maintains, that the systemic risk of banks and financial institutions has changed and risen in recent years. According to his view, this is due to a more widespread use of credit derivatives. Although they may cause a more efficient distribution of credit risk in the banking sector, at the same time they could mean a higher vulnerability of the banking sector to system-wide contagion effects of credit risk. As such, financial market supervision as well as the Basel II rules on Capital Standards should take into account not only the credit risk exposure of individual financial institutions, but also correlation measures of their share prices.For Thomas Gehrig, empirical anomalies demonstrate the relevance of awareness and trust in financial markets. This note would argue in favor of social policies that enhance public awareness in financial markets as a basis for trust. And so naturally, these policies need to be complemented by a strong financial order that aims at minimizing behavioral risks. He says, trust requires a regulatory framework that reduces manipulation by private as well as public interests. A competitive order complemented by strong regulatory oversight may go a long way towards generating liquid financial markets and the creation of trust. Trust by individuals, however, would be most strongly encouraged when individuals are entrusted in managing their own financial market activities including their own pension arrangements.

scholarly journals The Effectiveness Of Credit Derivatives On Bank Holding Company Portfolio Management

2011 ◽  
Vol 4 (9) ◽  
Author(s):  
Vernie Alexander-Andrew
Keyword(s):  
Portfolio Management ◽  
Hedge Funds ◽  
Credit Derivatives ◽  
Insurance Companies ◽  
Management Tool ◽  
Holding Companies ◽  
Bank Holding Company ◽  
Market Participants ◽  
Credit Risks ◽  
Potential Customers

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">Since their introduction in 1991, the global credit derivatives market (excluding asset swaps) has grown, exceeding previous expectations for 2003, with an estimated market of $3,548 billion or $3.5 trillion.<span style="mso-spacerun: yes;">&nbsp; </span>Growth is expected to reach $8.2 trillion by 2006 (BBA 2004).<span style="mso-spacerun: yes;">&nbsp; </span>At the time of entry to the market in the early 1990&rsquo;s, it was also expected that the largest potential customers would be commercial banks that are the largest holders of risky debts.<span style="mso-spacerun: yes;">&nbsp; </span>In 2005 as in previous years, banks, securities houses and insurance companies still constitute the majority of market participants while hedge funds, which emerged as players on the buy side of the market in the last report, have this year also become major players on the sell side, and are expected to have a greater share of the market than securities houses by 2006 (BBA, 2002) While market risk allows opportunities for both profits and losses, credit risks only result in losses, and the objective of this research is to examine the effectiveness of credit derivatives as a risk management tool in improving the performance of portfolios for Bank Holding Companies (BHC&rsquo;s).</span></span></p>

Credibility and Reform of Financial Institution Regulation

2001 ◽  
Vol 04 (03) ◽  
pp. 359-364 ◽  
Author(s):  
Gary Stern
Keyword(s):  
Financial Institutions ◽  
Government Regulation ◽  
Financial Institution ◽  
Time Consistency ◽  
Policy Makers ◽  
Market Participants ◽  
Consistency Problem ◽  
Bail Out ◽  
Reserve System ◽  
Credible Policies

There is heightened interest in reforming government regulation of financial institutions to make better use of market discipline and data. We strongly support such reforms, which are being implemented to some degree by the Federal Reserve System. However, market oriented reforms will not work unless government policies are credible in putting market participants, especially those at the largest financial institutions, at risk of loss. Establishing credible policies requires that governments address the time-consistency problem head-on. As a result, we recommend policies that establish credibility by directly reducing the incentive that policy-makers have to protect the creditors of financial institutions. Other policies, which do not address the fundamental reasons why policy-makers bail out creditors, are therefore likely to be circumvented when large banks get into trouble.

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