Chapter 11. Innovation, the credit crisis and the future

Innovation Outstrips Risk Management


Credit default swaps are becoming the most important instrument I’ve seen in decades.

 --Alan Greenspan

When credit default swaps appeared in the early 1990s, they were used primarily by banks to hedge the default risks they faced in their loan portfolios. But by the late 1990s the use of these swaps had spread to the larger credit market, and two Deutsche Bank researchers could write that ‘credit derivatives are no longer an exotic corner of the bond market but must now be considered a market in its own right’.

In discussing the role of credit derivatives in the US, Alan Greenspan, then the chairman of the Federal Reserve Board, in a speech in September ...

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