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.
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 Frank Schnittger - Oct 27 4 comments
by joelado - Oct 20 14 comments
by Frank Schnittger - Oct 19 27 comments
by Frank Schnittger - Oct 16 7 comments
by Frank Schnittger - Oct 14 2 comments
by Frank Schnittger - Oct 5 128 comments
by DoDo - Oct 2 10 comments
by Frank Schnittger - Oct 274 comments
by joelado - Oct 2014 comments
by Frank Schnittger - Oct 1927 comments
by Frank Schnittger - Oct 167 comments
by Frank Schnittger - Oct 142 comments
by Frank Schnittger - Oct 5128 comments
by DoDo - Oct 210 comments