January 2012 Capital Markets Monitor

Five Years On, Credit Risk Remains Acute

• The defining feature of the global financial crisis has been sharply elevated credit risk (including counterparty risk) causing substantial declines in the market prices of many financial assets.
• As the crisis has spread from the financial sector to the sovereign sector, particularly in the Euro Area—and now connecting the two in a vicious circle—policy mistakes have aggravated the situation. Consequently, five years on, banking systems in Europe and the U.S. remain fragile, and even dysfunctional in some cases.
• This reinforces the deleveraging process which has kept the economic recovery feeble. The key question for 2012 is whether the resilient parts of the global economic and financial system––the emerging market economies and the non-financial corporate sectors––are robust enough to cushion the potential impact of high credit risk in the mature economies.

Following the monthly publication of the Capital Markets Monitor Hung Tran hosted a teleconference on January 5, 2012. The presentation and audio recording of the briefing are now available for viewing or download.

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The Regulation of the CDS Market: Facts and Issues

June 17, 2010 — This staff discussion note takes a detailed look at the regulation of the market for credit default swaps (CDSs). The rapid growth of the CDS market, its tremendous size as measured by gross notional amounts (over $30 trillion at present), and its perceived role in the global crisis have led to intense debate about the need and the way to strengthen regulatory oversight of the market.

Reviving Securitization Safely: A Staff Discussion Note

June 4, 2010 — As a vital prelude to reviving securitization markets, the vulnerabilities exposed during the recent crisis must be addressed. This staff discussion note sets out a range of private-sector views on how best to accomplish this. Many market participants would argue that against a backdrop of carefully calibrated improvements in the regulatory environment, a revival of securitization can best be achieved via private-sector initiatives. These initiatives include strengthening lending and underwriting standards, enhancing credit rating agency standards, and improvements to the process of securitization in areas such as documentation, transparency, and reduction of product complexity.

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