Credit Risk Transfer

by BIS Committee on the Global Financial System

January 2003

Executive summary: Techniques for transferring credit risk, such as financial guarantees and credit insurance, have been a long-standing feature of financial markets. In the past few years, however, the range of credit risk transfer (CRT) instruments and the circumstances in which they are used have widened considerably. A number of factors have contributed to this growth, including: greater focus by banks and other financial institutions on risk management; a more rigorous approach to risk/return judgments by lenders and investors and an increasing tendency on the part of banks to look at their credit risk exposures on a portfolio-wide basis; efforts by market intermediaries to generate fee income; a generally low interest rate environment, which has encouraged firms to search for yield pickup through broadening the range of instruments they are prepared to hold; and arbitrage opportunities arising from different regulatory capital requirements applied to different kinds of financial firm. The significance of CRT seems to vary appreciably across firms and market segments. Thus, for example, the intermediation of credit default swaps seems to be a major business line for a small, but only a small, number of firms; and CRT markets are particularly active for major company credits, much less so for SMEs. Given these differences, it may be misleading to talk about the overall impact of CRT. However, while CRT flows have been substantial, and despite recent growth, CRT activity seems still to be relatively small compared with the outstanding stocks, and even the current flows, of credit-risk-related instruments.

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