The European Tribune is a forum for thoughtful dialogue of European and international issues. You are invited to post comments and your own articles.
Please REGISTER to post.
It's a Bright Shiny Object!
Skepticism is the first step on the road to truth. -- Denis Diderot
Granted, but if you buy CDS protection it's because you expect to be paid in case it is triggered, right?
the whole point of CDS swaps was to enable you to treat risky junk as though they were AAA investments and relieve you of the obnoxious reserve requirements
Okay, let's parse this.
The following table applies for its risk-weighting:
Claims on sovereigns and their central banks will be risk weighted as follows:
Credit AssessmentAAA to AA-A+ to A-BBB+ to BBB-BB+ to B-Below B-UnratedRisk Weight0%20%50%100%150%100%
Capital is 8% of risk-weighted assets.
So... take a Greek bond.
Before the crisis started, Greece was in the category where its bonds had a risk weighting of zero. So, holding a Greek bond costed no capital.
Now, Greece is rated below B, so its risk weighting is 150%, so the capital charge is 8% times 150% or 12% of notional.
You can buy a CDS at a 16% annual premium. The capital charge for the AAA CDS is 8% times 20% or 2%.
So, does it pay to free up 10% of notional from the capital charge, at the expense of 16% annually in CDS premia? I don't think so.
Economics is politics by other means
by afew - Mar 7 17 comments
by DoDo - Mar 1 13 comments
by marco - Mar 3 43 comments
by maracatu - Feb 25 13 comments
by Oui - Mar 5 56 comments
by Metatone - Feb 28 7 comments
by Katrin - Feb 20 13 comments
by A swedish kind of death - Feb 20 26 comments
by afew - Mar 717 comments
by Oui - Mar 556 comments
by Oui - Mar 413 comments
by marco - Mar 343 comments
by vbo - Mar 123 comments
by Oui - Mar 11 comment
by Oui - Mar 13 comments
by DoDo - Mar 113 comments
by Metatone - Feb 287 comments
by vbo - Feb 27110 comments
by gmoke - Feb 263 comments
by vbo - Feb 25102 comments
by maracatu - Feb 2513 comments
by Oui - Feb 2427 comments
by Oui - Feb 2214 comments
by Oui - Feb 211 comment
by Katrin - Feb 2013 comments
by Democrats Ramshield - Feb 202 comments
by A swedish kind of death - Feb 2026 comments
by Democrats Ramshield - Feb 191 comment