Risk: The New Management Imperative in Finance

Credit Risk Management for Trading 10

Fifteen years ago, the concept of credit risk for trading was pretty much covered by limits on placements between banks. Placements are short-term interbank loans that facilitate liquidity. Although interbank placements can be quite large, they were and remain a small part of overall credit exposure and risk. Banks' credit exposure to each other was not significant compared to their credit exposure from commercial lending. By 1987 derivative product volumes had become a very notable new source of credit exposure. Exhibit 10.1 illustrates the growth over the past ten years and how OTC trades have come to predominate.¹

Until recently, ISDA was perhaps the only source for Global OTC derivative activity data. ...