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Credit default swaps – Financial innovation or financial dysfunction?

Sanjiv Das ()

Financial Stability Review, 2010, issue 14, 45-53

Abstract: 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.

Date: 2010
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