Credit derivatives in Swedish banks : Both sides of the coin

Abstract: Background: The financial crisis of 2007-2010 had a massive impact on the financial markets worldwide. The crisis was partly blamed on the credit derivatives collateralized debt obligations and credit default swaps. These instruments were used to create leverage and speculation, which led to uncertainty in the financial system worldwide. There has been no recent documentation of how credit derivatives are used in Swedish banks, and what risks and opportunities they bring along. Purpose: The purpose of this thesis is to describe the use of credit derivatives in Swedish banks, what benefits and risks they may generate and how the recent financial crisis has affected their use. Research Method: This is a qualitative multiple case study which uses an inductive approach. The study covers four cases, three of the largest Swedish commercial banks, and a bank that specializes on international financing. Seven people working in different fields in these banks have been interviewed. Conclusions: Credit derivatives are mostly used for hedging in Swedish banks, which mainly involves the use of credit default swaps, and sometimes iTraxx. Purely speculative trades are rare. The risks that arise are mainly due to lack of transparency in OTC trading, and abusive use of these instruments. Credit derivatives greatly facilitate risk management in banks. Regulations have increased since the financial crisis and the demand for more complex products greatly decreased.