How to move away from contracted risks ?

Those are quotation from Satyatis Das book about derivatives, from the 9th chapter : ” credit is like glue, it is the stuff that holds banks together. Everything a bank does involves taking credit risk.” The fact that credit has been the “glue” that holds banks together is quite easy to figure out. Indeed, clearing houses (chambres de compensation in French) are very important within every state to insure that credit and debit between all commercial banks are well balanced. Please see my last post about the subject.

During chapter 9, Satyatis Das also stress out the traditionnal difference between commercial and investment. Usually, and even though it is less and less the cas nowadays, commercial banks are the only ones do deal directly with risks while granting credits to households or companies, as well as public entities. I can’t help thinking about what my friend – former employee of accenture – told me about investment banks : “investment banks do not need to deal with risks, it is not their initial aim. They are only comfortable with something you can trade, get in and out of. So, they designed derivatives as a financial bundle designed to transfer risk abroad, a nice product to sell and to buy to investors all over the world who don’t understand risks involved in what they were buying.

During the 90s, there has been a credit war between commercial banks and investment banks because they both wanted to do the same thing. The credit war ended up with the creation of U-banks, so called universal banks which have the function of both a commercial and an investment bank.

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