Out-Law News 1 min. read

Cost of credit default swaps falls to lowest level since financial crisis began

The cost of credit default swaps (CDS) has fallen to its lowest level since the global financial crisis began, the Financial Times has reported.

CDS are often purchased by buyers of bank debt to help insure against payment default.

Five-year CDS protection on bonds issued by Goldman Sachs, Morgan Stanley, Wells Fargo, Citigroup and Bank of America this month reached their lowest levels since late 2007 or early 2008, Bloomberg has said, according to the Financial Times.

Bank CDS levels in Europe have also fallen.  The cost of CDS at Barclays Bank fell to 50 basis points (bps) representing its lowest level since February 2008, said the Financial Times. CDS levels for the French banks BNP Paribas and Société Générale have fallen to 56.5 bps and 62.3 bps respectively, the lowest since early 2008 according to the newspaper.

The price paid for bank CDS is regarded as a gauge of a financial institution’s perceived riskiness. The premium paid for protection widened in 2008 and early 2009 as the financial crisis emerged.

The fall in the cost of CDS follows increased regulation in the banking sector across the globe. In Europe, the European Central Bank (ECB) is subjecting the euro zone's largest banks to stress tests, or hypothetical worst case scenarios, ahead of taking on the role of single regulator for the biggest banks in the euro zone in November.  

Brian Monteleone, an analyst at Barclays, told the Financial Times:  “We’ve gone back to pre-crisis levels. Capital is much higher today than it was pre-crisis. The economic environment is vastly improved. Regulations are in place today that didn’t exist five to 10 years ago that increase confidence that the ability of banks to get too levered is reduced.”

A Barclays index of CDS on US banks dropped to 86 bps this month, the lowest level since July 2007, and a far cry from the 701 bps reached in March of 2009, just before the Federal Reserve announced its emergency bond-buying programme.

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