MESSAGES: A CDS can be considered an insurance policy against a government or company defaulting on its debt. The CDS market price is a real-time measure of its perceived default risk. Bank CDS levels have been in the news. But levels for the world’s most globally important banks (see below) remain low. Implied default rates for most are well below 1% and range to only 4% for the highest. Levels a fraction of CS’ 1,265 peak. Most big bank CDS are lower than six months ago. This is an individual and not systemic bank ‘scare’. Though with significant macro consequences. CDS levels can also be used as country risk indicators. US CDS has been rising, as the debt ceiling showdown looms, but implied default risks are only a low 0.8%.
CDS: A credit default swap (CDS) is a contract that transfers the credit risk of a company or country loan. Its like an insurance policy. The seller agrees to pay compensation if a loan default occurs, for a premium. As such, changes in CDS prices can be used as implied measures of this default risk. The total amount of global CDS outstanding is estimated at $9 trillion. Whilst $30 trillion was traded last year, the most since 2009. This was driven by higher risks as interest rates rose. But also as less bond issuance drained liquidity from that market. Country CDS is 15% of the market. Bank CDS 20%. The rest are non-financials (25%) and multi-sector (40%).
GSIB: Credit Suisse was one of only thirty banks classified as globally systemically important – a GSIB. So is UBS. The list is set by the Financial Stability Board (FSB), an international body established after the 2008 global financial crisis. They look at bank size and global importance. Banks are allocated to buckets 5-1 depending on relevance, and need to have proportionately higher capital buffers than others. They also have higher supervision levels and wind-up plans.
All data, figures & charts are valid as of 28/03/2023