US banks have huge exposure to European debt market
09 November 2011
US banks have an exposure of $767 billion to the European debt market as per recent data by the Bank of International Settlements (BIS). This includes $518 billion in Credit Default Swaps (DCS) and $181 billion in direct lending. With these banks stating that their exposure has been covered, it raises the question who insures the insurer?
A Credit Default Swap (CDS) is like an insurance whereby the insuring institution provide a guarantee to the buyer of the CDS to pay the debt in the event the debt holder defaults. In exchange, the buyer of the CDS pay a fee until the expiration of the CDS. But a CDS is different from an insurance in the sense that an outside party can buy a CDS.
At the end of Q3, the banks had reported that they held a net exposure of just $45 billion to Europe. What the US banks argue is that they have hedged against possible losses from CDS exposure. But so did many who had taken a CDS against US home mortgages with AIG prior to it’s subsequent crash in 2008.