Earlier Too-Big-To-Fail Posts
BREAK ‘EM UP Reason #8: Credit Default Swaps Are Insurance Masquerading as Derivatives
No product that was financially-engineered during the growth of the Great Bubble is as destructive as credit default swaps (CDSs). They are more insurance than derivatives. Only the largest banks trade them. Only a rather small percentage are cleared on central counterparty clearing platforms, despite Dodd-Frank. The International Monetary Fund (IMF) and many in the…
Read MoreBREAK ‘EM UP Reason #7: Regulators Cannot “Ring-Fence” Risk Out of TBTF Banks
Ring-fencing of risks may be a useful tool for financial sector regulators, but it isn’t a solution to systemic risk. In a systemic event, one cannot fence in trust and fence out fear.
Read MoreBREAK ‘EM UP Reason #6: Derivatives Trading Siphons Capital Out of the Banking Sector
Derivatives credit management practices siphon capital out of the commercial banking deposit system, capital that could otherwise be used to support lending. Small and medium-sized businesses face enough headwinds from globalization and technology. They don’t need this assault on their ability to borrow. Derivative contracts can serve a useful purpose. They just shouldn’t be…
Read MoreBREAK ‘EM UP Reason #5: TBTF Banks Are Tied Together Through Derivatives
Derivatives tie the world’s largest banks together in ways they’ve never been connected before. Credit ratings play a role, affecting derivatives in two ways — one from downgrades (a change in credit profile), the other from where these contracts are booked. This post covers the impact of a financial institution’s downgrade. The over-the-counter (OTC) derivatives…
Read MoreBREAK ‘EM UP Reason #4: TBTF Banks Use the FDIC to Cushion Against Losses
What a difference a credit rating notch can make. The biggest banks have used their FDIC-guaranteed, taxpayer-supported banking subsidiaries and the bank subsidiary’s credit rating advantage to reduce the capital behind their derivatives activities required by regulators to cushion against potential losses. This is another way that credit ratings influence derivatives through the taxpayer guarantee.…
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