Credit Default Swap And Risk Management Of Commercial Bank

As a critical instrument in the risk management of commercial bank, CDS is able to spread risk, refine balance sheet, and increase capital earning rate. So it has been popular with commercial bank of developed countries since 21st century, and the trading volume is increasing sharply. However, the commercial banks involved in the CDS business face huge losses as a result of the subprime crisis started at 2007, which finally causes global financial crisis. Based on analyzing the CDS operating mechanism, this thesis finds out the defect of CDS and the reason that causing financial crisis, analyzes the effect and risk of CDS objectively, and offers reference to commercial bank of our country for starting CDS business.Basing on analyzing CDS operating mechanism, this thesis finds out that because the CDS is the base of structuring synthetical CDO, the subprime crisis spreads from real estate to bank and other financial facilities step by step, which finally causes global financial crisis. Meanwhile, two defects of CDS pricing mechanism are exposed in this crisis: first, market information is over-dependent and the true condition of the entity is ignored; second, the liquidity decreases in the crisis. Just these two defects make lots of commercial banks face huge losses and even bankruptcy.Towards these two defects, this thesis provides a new model combining two models separately based on market information and accounting information, which enables the investors to estimate comprehensively possible default risk referring to the true condition of real asset, and avoid over-dependency to the rating institute. Towards the over-estimation of liquidity in the crisis, this thesis adds the liquidity factor to the new model in order to perfect the CDS pricing mechanism, and make it closer to the real default risk. This thesis makes empirical test separately to model based on accounting information, model based on market information, comprehensive model and comprehensive model added liquidity factor, and proves the effectiveness of the comprehensive model added liquidity factor.In order to discuss the necessity of applying this kind of credit derivative in our country, this thesis comments on the effectiveness of methods credit risk managemet of commercial banks of our country, and comes to the conclusion that CDS will act as a non-replaceable instrument in the risk management of commercial bank of our country. Benefiting from the lessons of commercial banks of developed countries during subprime crisis, we are able to use late-development advantage to build comparatively perfect pricing mechanism, transparent trading platform and uniform clearing center. We also strengthen the supervision, try out the CDS business step by step, and make the most of it under the condition of the risk is remained under control.