Analysis Of Risks Of Credit Derivatives And The Impact On Financial Stability

Credit risk is always a major problem of banking sector and the wholecapital market. Credit derivatives are effective tools of continuous developmentof Bank Credit Risk Management, but have suffered criticism in the subprimemortgage crisis. Since bank financing is a main methods in China, the bank hasaccumulated a large amount of credit risk, but the level of credit riskmanagement is low, the need for more advanced and flexible credit riskmanagement tools to manage risk is urgent. Analyzing the risks of creditderivatives and their impact on financial system stability will contribute to theintroduction of credit derivatives technology to enhance the process of credit riskmanagement system.In this paper, we first carry on a whole review of the credit derivativesmarket, then analyse the credit derivative product characteristic and the contractstructure, to trace its risk source. Next we elaborate the entire macroscopicmarket risk fluctuation in terms of information asymmetry and risk contagion.After carrying on the theoretical analysis of the credit derivative product risk, thisarticle goes through qualitative analysis, theoretical model analysis to discussthe impact on financial stability. Finally, this article uses the panel data ofeighteen main commercial banks in North America market, which held from2003to20101Q, to establish a VECM model and panel data model for theempirical study, inspected the credit derivation transaction, loan scale and theincome influence.Through theoretical discussion and empirical test, we draw severalconclusions: First, the credit derivatives with high leverage, opaque in nature,are not regulated and the inherent risks in the contract itself may make it deviatefrom the essence of risk management. Second, the incentive of banks to takerisk will be intensify by credit risk transfer. Third, credit derivatives help totransfer credit risk between different institutions, but the financial system stabilitydepend on the ability of the final recipient to absorb risk. Fourth, theestablishment of sound regulatory system, clear terms of the contract and the relevant legal provisions benefits the development of the credit derivativesmarket and credit risk management.