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Financial Crisis in 2008 and Do Credit Derivatives Increase Bank Risk

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The financial crisis had been the major cause of homelessness and unemployment, particularly for the world’ s major economies. The financial crisis became a concern for regulators and they began to alter rules and regulations under Basel II. The need for better risk and liquidity management had forced the regulators to introduce Basel III, stricter guidelines in order to set up a crisis-resistant international banking system and plug in the loopholes of previous banking supervision regulations that had led to the crisis. Credit risks Financial management is concerned with increasing rates of return for a specified exposure to risks.

For tracing out the magnitude of credit risk an individual should refer to the asset involved which is termed as credit risky (Banks, Glantz and Siegel, 2007, p. 17). The financial crisis had already proved that increased risks on credit for asset portfolios had dragged the banks towards bankruptcy. The move towards securitization of markets proved o be wrong. This is because it harmed consumers’ protection in loan market although they were overextended (Kiff and Mills, 2007). When risks, both idiosyncratic and for sectoral factors are imperfectly diversified, it gives less support to capital computations under approaches related to IRB.

Presence of immense concentration of risks may violate The Asymptotic Single risk factor model. The previous credit risk measures were unable to perform full synchronization of underlying default risks to all the sectors of business which led to diversion from elementary IRB model for risk management. Post-crisis computation of credit risks for portfolios related to credit has been termed extremely important to detect the link between banks and the asset markets (Studies on Credit Risk Concentration, 2006).

The recent years had seen a considerable increase in credit risk transfer particularly adopting the form of credit derivatives (Credit Risk Transfer, 2004). Only with sufficient knowledge of credit risks the credit derivatives can be effectively used to minimize underlying risks.  

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