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Credit default swaps – Financial innovation or financial dysfunction?

Credit CDS contracts were originally designed to transfer and disperse default risk within the capital markets to strengthen the resilience of financial institutions. The Global Financial Crisis has revealed that CDS contracts may not in fact achieve these objectives and may in fact increase the leverage within the system and also increase systemic risks in other ways. Documentary complexity, counterparty risk and increased concentration risk, brought about by CDS contracts, have contributed to the crisis and made it difficult to deal with key issues. CDS contracts may be presented as an important financial innovation, but actually are a major financial dysfunction and a cause of risk within financial system under certain circumstances.

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Article provided by Banque de France in its journal Financial stability review.

Volume (Year): (2010)
Issue (Month): 14 (July)
Pages: 45-53

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Handle: RePEc:bfr:fisrev:2010:14:6
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/

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