Development Of Credit Derivatives And Banking Stability: Theory And

In response to the U.S. subprime mortgage crisis from mid-2007, however, a general reassessment of risks inherent in credit derivative is observed across the whole financial community, which probably constituting a serious threat of systemic fragility. After the event the crisis it is a story has duality by world researcher and see a gradually recovery. Apart from credit derivatives developed entity of Europe, the United States and Japan, the country of China, India, South Korea and other countries, accelerate the pace of development of the domestic market for credit derivatives. The face of the credit derivatives market trends introduced one after another, there is an urgent need us to answer whether the credit derivatives can really take on the important task of improving banking functions, strengthening the mechanisms of risk diversification and promoting the banking stability, and which conditions need to meet.To this end, on the one hand, this article from a more microscopic point of view to analyze this problem:the micro bank decision-making process for credit derivatives. Because whether the bank’s own capital, assets, risks, policies, macro-financial and economic situation, regulatory policy and the overall level of risk, its impact on the banks into micro decision-making behavior of bank credit derivatives trading, from this perspective You can rationalize the microeconomic decision-making process of the bank’s risk status. On the other hand, by following direction of risk transfer and analysis of credit risk transfer and dispersion path, we can assess the spillover effects of the transfer of risk in the banking sector.This paper based on three perspectives of the credit market characteristics (credit derivatives decision), the financial structure (the vulnerability of bank and non-Bank sector) and credit derivatives transaction banking exposures (the risk contagion network model). By focusing on the question of why^who and how do banks use credit derivatives, it research credit derivatives trading decision-making, the effectiveness and impact on bank stability. Combined these conclusions with the characteristics of the China banking and credit derivatives market status, this paper makes several relative policy recommendations for China’s banking stability and credit derivatives market.First of all, it concluded the credit derivative products essential characteristics credit risk sharing and contagion mechanism, and summarized the concept of credit derivatives, characteristics, market and banking stability, focused on credit default swaps (CDS)、collateral debt obligation (CDO) credit derivatives pricing, trading strategies and risk characteristics. The paper research the positive and negative impact of credit derivatives trading on banking stability.Secondly, because of the pursuit of maximizing the value of the decision-making process in a single bank, Bank transfer and retained credit asset risk decision-making is based on the difficulty of credit risk transfer costs, which depending mainly on price elasticity of credit markets, so the analysis of the risk characteristics of the underlying credit assets is important basis of this article researching microeconomic credit derivatives decisions on individual banks’ stability. At the same time, test it by U.S. banks and credit derivatives date.Thirdly,with an established financial market system of banks and non-bank sector for different risk vulnerability assumptions, it studied stabilizing effect of credit derivatives which is an important part of credit derivatives transactions effect for banking stability mechanism. At the same time, the use of credit derivatives transaction history data of large banking group to analysis credit derivatives trading market. Apart from this, the article use the matrix model approach based on bilateral exposure and network model, network topology characterize the degree of association of the CDS market. This paper catch their credit derivatives trading behavior before and after the financial crisis, and the U.S. CDS market impact on the stability of the U.S. banking industry as a whole. Also we simulating cross-default and contagion process of credit risk in the financial network.Finally, based on the comparative study of the Sino-US financial structure and characteristics of China’s banking industry, drawing on the experience of the development of the credit derivatives market in the United States, in particular, according to preliminary conclusions drawn from the micro-bank decision-making, banking credit derivatives trading and banking network transaction, it developed policy recommendations for China’s market of credit derivatives.