Credit default swaps and banks

Muhammad Mushafiq

doi:10.1016/b978-0-44-313776-1.00112-4

Credit default swaps and banks

Abstract

This chapter aims to explore the evolving role of credit default swaps (CDS) in managing and transferring default risk from the perspective of banks from a holistic perspective. This chapter examines credit default swaps (CDSs) as derivative financial instruments that transfer credit risk on debt securities. While CDSs offer benefits such as risk management and risk trading, they also introduce potential systemic risks, as evidenced by their role in the 2008 financial crisis. The collapse of American International Group (AIG) serves as a case study, highlighting the complex interactions between banks, CDSs, and the broader financial system. AIG’s exposure to mortgage-backed securities through CDSs led to significant losses and threatened the stability of the financial system.