The Risk Implications of Complex Credit Markets
Lessons from Lloyds of London and a simple spider's web
We consider whether an increasingly complex and inter-connected financial system is necessarily a safer one, as some have claimed. We conclude that it is not, in fact the reverse is true.
This is in large part because of the way that the credit derivatives market has developed. As has been the case in the past, instruments that have been conceived as risk management tools have mutated and spun out of control.
We believe that they have introduced a new kind of hidden systemic risk into the financial system, which arises from the nature of these derivatives, together with a combination of its complexity taken together with the ways that risk is measured, managed and reported.