CDS Spreads As Default Risk Indicators

CDS Spreads as Default Risk Indicators
Robert J. Grossman, Group Managing Director Martin Hansen, Senior Director February 2011
Why Study CDS Spreads?

Property-Sensitive Sectors CDS Spreads
Monoline (bps) REIT Home Builder
3,000 2,500 2,000 1,500 1,000 500 0 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10
Source: Fitch Ratings, Fitch Solutions.
Pronounced volatility in CDS spreads during the crisis Spreads are one of the analytical tools used by Fitchs credit analysts (e.g., identifying outliers)
www.fitchratings.com
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Agenda
Overview: CDS vs. Bonds Methodology US Experience During the Crisis Europe: Banks and Insurers Risk Management Implications
Margining: A Closer Look

Margining Practices CDS Leverage and Return Dynamics Systemic Implications
Appendix: Select Research on Other Topics

US Money Fund Exposure to European Banks Burden-sharing Samples Used in CDS Analysis
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Overview: CDS vs. Bonds Methodology US Experience During the Crisis Europe: Banks and Insurers Risk Management Implications
CDS Embed both Long and Short Positions

Credit Default Swaps Overview
CDS Premiums (Cost of Insuring the Reference Entity) Protection Seller (Long Credit Risk) Insurance Payout (Upon a Credit Event of the Reference Entity) CDS are economically akin to insurance and provide an investment alternative to bonds. The protection seller insures an underlying risk exposure (the reference entity) against a credit event, such as bankruptcy or failure to pay. CDS credit events and bond defaults are generally aligned, but can differ (i.e. the conservatorship of Fannie Mae and Freddie Mac triggered their CDS but did not result in bond impairments). The protection buyer, in turn, must pay contractually-specified premiums. However, unlike insurance, CDS contracts are actively traded in secondary markets. CDS returns thus typically depend more on spread changes (and premium income) than a triggering of a credit event. Spread tightening benefits the protection seller; spread widening benefits the protection buyer. Protection Buyer (Short Credit Risk)
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CDS Spreads as Risk Indicators

CDS spreads increasingly used for risk analysis
Market-implied view Updated frequently (e.g., daily) Applications: valuation, portfolio strategy, funding conditions
Also provides an alternative perspective of an entitys creditworthiness

E.g., Fitch uses in helping to identify credit outliers
Converting spreads to probabilities of default (PD)

Assume 60% loss severity (i.e., 40% recovery rate) Annual CDS spread = 120 bps Thus, one-year probability of default = 2.0%
Probability of Default (1 yr) = CDS spread (annualized) / Loss Severity
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Background & Assumptions

Data sourced from Fitch Solutions
Monthly averages of daily (annualized) CDS spread observations Observations are excluded if based on low liquidity or if occurring after a credit event
Fixed (rather than stochastic) recovery rate

Higher loss severity assumption lower implied PD Banks, insurance companies, homebuilders, REIT = 60% loss severity Monolines insurer = 80% loss severity
Risk-neutrality
Spreads do not embed risk premium beyond compensation for expected or average credit losses Of course, not necessarily the case in the real world Risk aversion Large downside of default events Concentration risk
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Overview of Findings
Volatility in the Relative Risks of Sectors over the Crisis
June 2007 October 2008 March 2009 August 2010 CDS CDS CDS CDS Spread Implied spread Implied spread Implied spread Implied Sector (bps) PD (%) Sector (bps) PD (%) Sector (bps) PD (%) Sector (bps) PD (%) HB 101 1.7 Monoline 1,656 20.7 Monoline 2,902 36.3 Monoline 1,527 19.1 REIT 40 0.7 REIT 607 10.1 REIT 1,081 18.0 REIT 275 4.6 Monoline 37 0.5 HB 447 7.5 Insurance 460 7.7 HB 249 4.2 Insurance 30 0.5 Bank 310 5.2 HB 313 5.2 Bank 161 2.7 Bank 26 0.4 Insurance 267 4.5 Bank 243 4.1 Insurance 151 2.5 HB Homebuilder. Notes: The October 2008 and March 2009 periods illustrated above are intended to represent different points in time during the financial crisis and do not necessarily reflect peak CDS spreads for each sector. Figures above are annualized. Source: Fitch Ratings, Fitch Solutions.
CDS-implied PD for US sectors that experienced pronounced volatility during the crisis Analyzed PD trends during different phases of the crisis Backtest of PD vs. subsequent realized defaults / credit events
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Monolines: A Closer Look

Monolines CDS Spreads and Implied PDs
(bps) Second Peak Spread = 1,510 bps Implied PD = 18.9%
3,500 3,000 2,500 2,000 1,500 1,000 500 0 6/07
Third Peak Spread = 2,902 bps Implied PD = 36.3%
First Peak Spread = 490 bps Implied PD = 6.1%
9/07 12/07 3/08
6/08
9/08 12/08 3/09
6/09
9/09 12/09 3/10
6/10
Spreads appeared to lead observable deterioration in credit fundamentals More than 60% of sample suffered a credit event / distress (i.e., CCC rating or lower)
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REIT and Homebuilders: A Closer Look

REIT and Homebuilders CDS Spreads and Implied PDs
REIT (bps) Homebuilder
1,200
Second Peak (REIT) Spread = 1,154 bps Implied PD = 19.2% Second Peak (Homebuilder) Spread = 481 bps Implied PD = 8.0%
1,000
800
First Peak (Homebuilder) Spread = 385 bps Implied PD = 6.4%
600
400
First Peak (REIT) Spread = 409 bps Implied PD = 6.8%
200
0 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10
Rise in implied PD, but no credit events in year following the peak PD for REITs increased by a multiple of 30x from trough to peak
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U.S. Banks and Insurance Companies

Financial Services
(bps)
CDS Spreads and Implied PDs

Banks Insurance
600 500 400 300 200 100 0 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10
Source: Fitch Ratings, Fitch Solutions. Second Peak (Banks) Spread = 247 bps Implied PD = 4.1% First Peak (Banks) Spread = 427 bps Implied PD = 7.1% Peak (Insurance) Spread = 487 bps Implied PD = 8.1%
Only credit event (Washington Mutual) was coincident with 1st peak in implied PD Extraordinary external support (e.g. government assistance, acquisition) thus, senior debt obligations continued to perform, despite weakened condition
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U.S. Broker-Dealers
U.S. Broker-Dealer CDS Spreads by Entity
Goldman Sachs Group Merrill Lynch & Co., Inc. Bear Stearns Companies Inc. Lehman Brothers Holdings Inc. Morgan Stanley
800 700 600 500 400 300 200 100 0
(bps)
March 2008 CDS spreads = 274 bps Implied PD = 4.6% October 2007 CDS spreads = 68 bps Implied PD = 1.1%
1/ 06 4/ 06 7/ 06 10 /06 1/ 07 4/ 07 7/ 07 10 /07 1/ 08 4/ 08 7/ 08 10 /08 1/ 09 4/ 09 7/ 09 10 /09 1/ 10 4/ 10 7/ 10 10 /10

Note: CDS spreads in text boxes are aggregated for the broker-dealer sector as a whole and calculated as the average of the spreads of the individual entities. Sources: Fitch Ratings and Fitch Solutions.
Prior to crisis, spreads were relatively low for extended period As of October 2007, PD for sector was 1.1%... however, several events of distress over ensuing 12-month period Highest CDS spread observed during period of study: Morgan Stanley (700 bps in October 2008)
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Differing Experience for US vs. European Banks

(bps) 450 400 350 300 250 200 150 100 50 0 September 2008 US spread = 427 bps Implied PD = 7.1% versus EUR spread = 127 bps Implied PD = 2.1% Peak spread (EUR) = 184 bps Implied PD = 3.1% Implied PD = 3.3%
Banks - US vs. Europe

US (25 o f the largest No rth A merican banks, including majo r regio nals) EUR (25 largest banks, drawn fro m the glo bal To p 50 by assets)
De c06
De c07
De c09
US banks experienced more pronounced distress at peak More recent convergence (e.g., as of Dec 2010Europe = 146 bps versus US = 125 bps)
De c10
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De c08
Ju n07
Ju n06
Ju n09
Ju n10
Ju n08
13
European Banks (By Country)

(bps) 250 June 2010 (Spanish banks) Spread = 233 bp Implied PD = 3.9%
CDS Spreads By Select Country (based on 25 largest EUR banks)

France (4 banks) Germany (3 banks) Italy (2 banks) Spain (2 banks)
200
150 100 June 2007 (average) Spread = 8 bp Implied PD = 0.1%
50
De c06
De c07
De c08
De c09
Relatively low implied PD during initial stages of the credit crisis Changes in ordinal ranking over time (e.g., each has been the widest at some point since March 2009)
De c10
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Ju n08
Ju n09
Ju n06
Ju n07
Ju n10
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European Banks (Credit Events)

Credit Events - Spreads and Implied PD for Prior 12 Month Period
Anglo Irish (Nov 2010) Kaupthing (Oct 2008) Mean (four banks) (bps) 2,500 2,000 1,500 1,000 500 0 Bradford & Bingley (Jul 2009) Landsbanki (Oct 2008) (implied pd %) 40 35 30 25 20 15 10 5 0
m t1
12
11
10
t-
t-
t-
t-
t-
t-
t-
t-
Avg. implied annual PD 1-year prior to Credit Events: 4.1% Avg. implied annual PD 3-months prior to Credit Events: 10.9%
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t-
t-
CE
t-
(t= 0)
15
European Insurance Companies

(bps) 600 500 400 300 200 100 0 March 2009 (peak) Spread = 507 bps Implied PD = 8.5%
Major European Insurers (sample of 17 entities)
June 2007 Spread = 12 bps Implied PD = 0.2%
De c07
De c08
De c09
De c06
No events of distress (e.g., default / downgrade to CCC or below) for insurers in this sample
De c10
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Ju n06
Ju n07
Ju n08
Ju n09
Ju n10
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Risk Management Implications

CDS spreads can provide timely, market-based indicators of risk
Particularly useful for valuation, active portfolio management, and assessing funding conditions In some cases, spreads lead observable credit deterioration (e.g., monolines during the crisis) Complement the informational content of other risk assessment tools (e.g., identifying outliers)
Important to recognize the potential for false positives and volatility
For example, if used peak spreads during crisis as a credit risk indicator, then either:
Costly hedge Opportunity cost if sold off positions
Additionally, both benefits and caveats in using spreads to derive PD estimates

E.g., input to regulatory / economic capital calculations More point-in-time view, but could undermine stability and reliability of results Procyclicality (higher PD lower capital ratios de-leveraging further spread widening)
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Regulatory / Economic Capital Management (US example)

Volatility in CDS-Implied PD Could Drive Cyclicality in Basel Capital Charges
(%) Sector Monoline REIT Homebuilder Bank Insurance Period Trough Peak Current Trough Peak Current Trough Peak Current Trough Peak Current Trough Peak Current PD 0.5 36.3 19.1 0.7 19.2 4.6 1.7 8.0 4.2 0.4 7.1 2.7 0.5 8.1 2.5 LGDa 80 80 80 60 60 60 60 60 60 60 60 60 60 60 60 Reserves (Expected Loss) 0.4 29.0 15.3 0.4 11.5 2.7 1.0 4.8 2.5 0.3 4.3 1.6 0.3 4.9 1.5 Basel Capital Charge (Unexpected Loss)b 13.0 38.4 38.2 8.6 25.2 15.6 11.7 18.9 15.0 8.8 21.4 16.3 9.7 22.4 16.0 Expected Loss + Unexpected Loss 13.3 67.4 53.5 9.0 36.7 18.3 12.7 23.7 17.5 9.1 25.7 17.9 10.0 27.3 17.6
Monoline LGD is assumed to be higher than for the other sectors, consistent with the realized average final price from CDS auctions for monoline reference entities that have experienced a credit event. bThe Basel capital charges are based on the IRB formulae for each respective asset class and, for monolines, banks, and insurance companies incorporate the 25% upward adjustment in correlation values for financial institutions under the recent Basel III revisions. Capital charge calculations are based on an 8% total capital requirement, which is consistent with both the Basel II and Basel III calibrations (notes that Basel III capital calculations above do not reflect the capital conservation buffer of 2.5% that will be phased in over the next several years). Source: Fitch Ratings, Basel Committee on Banking Supervision.
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Drivers of Disconnects in Spreads vs. Fundamentals?

Total return orientation of market participants (i.e., MTM value of CDS positions)
Not necessarily reflective of longer-term horizon (e.g., one year) / fundamental credit risk
CDS pricing can be driven by a number of factors not directly related to an entitys fundamental creditworthiness:
Liquidity conditions Counterparty risk Risk aversion of market participants (i.e., risk-neutrality assumption) Leverage inherent in CDS trading
As the markets came under increasing strain on account of the financial turmoil, liquidity in the CDS markets also began to dry up, raising doubts as to their value as an indicator of risk and funding costs.
European Central Bank, August 2009
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Margining: A Closer Look

Margining Practices CDS Leverage and Return Dynamics Systemic Implications
Margining: Some Definitions

Margin is security against a counterparty failing to perform on its obligations
Bonds purchased on margin = amount by which bonds market value exceeds loan to investor CDS = amount of collateral posted relative to market value (i.e., MTM) of the CDS contract.
Initial margin = size of down payment necessary to cover obligations under the CDS contract
Higher rates reduce both leverage and variability in return on capital (i.e., must commit more capital against CDS exposure) Lower rates increase leverage / ROC variability
Re-margining = posting of variation margin to cover in MTM of the CDS contract (i.e., restores margin relationship to initial rate)
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Determinants of Margin Rates

Margin rates are typically higher for:
Lower quality reference entities Riskier counterparties Longer-dated exposures
CDS margin rates for protection buyers (short credit exposure) are typically lower than for protection sellers (long credit exposure)
Consistent with fundamental asymmetry in credit spread movements
Typically managed on a portfolio basis

Examples in this study focus on individual CDS positions (for illustrative purposes)
Re-margining also depends on valuation of underlying risk exposure

Particular concern for CDS written on complex or illiquid assets (e.g., AIG)
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Margin Rates: Examples

Summary of Margin Rates for Investment-Grade Corporate Exposures
(%) Source IMF (April 2007) IMF (August 2008) Dealers (Estimate)a Institutional Investors (Estimate) a Garleanu/Pedersen FINRAb Committee on the Global Financial System (June 2007)c Committee on the Global Financial System (June 2009)c
a
CDS 1 5 57 7 5 47 N.A. N.A.
Bonds 03 812 10 15 25 N.A. 410 1020
Estimates are based on Fitch discussions with a sample of dealers and institutional investors. The margin rates cited should be treated as general approximations of market practices and are not meant to reflect an industry standard, since practices tend to vary to some degree across institutions. bBased on FINRA rule 4240 margining grid for reference asset whose credit spread is between 0 bp and 300 bps and has a five-year maturity. cApplicable range of haircuts based on corporate bonds rated BBB to A, with lower haircuts for prime and higher haircuts for unrated counterparties. Note that "haircuts" and "margin rates" are conceptually similar, but technically different. N.A. Not applicable. Sources: Committee on the Global Financial System, The Role of Margin Requirements and Haircuts in Procyclicality, (2010), Bank for International Settlements; Garleanu, Nicolae and Lasse Heje Pedersen, Margin-Based Asset Pricing and Deviations from the Law of One Price, (2009), mimeo; International Monetary Fund, Global Financial Stability Report: Financial Stress and Deleveraging, (2008); Securities and Exchange Commission, Proposed Rule Change by Financial Industry Regulatory Authority Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, (2009).
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Margin Rates and Leverage / Return Dynamics

Leverage magnifies 2.4% return on fully-funded cash position (if spreads tighten) but also amplifies the losses (in a spread widening scenario)
Margin Leverage, Exposure, and Return on Capital
Credit Spread (bps) Yield (%) Origination 100 2.50 1,000,000 10.0 10,000,000 9,000,000 10,000,000 0 1,000,000 5.0 20,000,000 0 50-bp Tightening 50 2.00 1,000,000 10.0 10,000,000 9,000,000 10,236,783 236,783 23.7 1,000,000 5.0 20,000,000 491,994 49.2 50-bp Widening 150 3.00 1,000,000 10.0 10,000,000 9,000,000 9,769,445 (230,555) (23.1) 1,000,000 5.0 20,000,000 (471,778) (47.2)
Bond (Noncallable)
Initial Margin (i.e. Capital) ($) Margin Rate (% of Notional) Initial Exposure ($) Borrowed Amount ($) Bond Market Value ($) Appreciation/Depreciation ($) Return on Capital (%)
CDS Protection Seller

Initial Margin (i.e. Capital) ($) Margin Rate (% of Notional) Initial Exposure ($) CDS MTM ($) Return on Capital (%)
The analysis above assumes: each instrument has a five-year tenor; both CDS and bond spread movements are identical; the CDS MTM is based on Treasury curve as of Aug. 4, 2010 and the on-the-run CDS contract; the market spread equals the deal spread when the contract is initiated, and as such, there is no upfront MTM payment; and the change in spreads is instantaneous and the returns therefore do not reflect contractual cash flows (e.g. CDS premiums or funding costs on the bond).
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Margin Rates and Leverage / Return Dynamics

Margin Rates and Return on Capital (CDS Protection Seller)
Return on Capital (100-bp Initial Spread; 50-bp Tightening; Five-Year Maturity) Return on Capital (100-bp Initial Spread; 50-bp Widening; Five-Year Maturity)
300
Return on Capital (%)
200 100 0 (100) (200) (300) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Margin Rate (%)
Investors return on capital profile is highly sensitive to initial margin rates. Higher margin rates would substantially reduce return variability
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Re-Margining and Leverage / Return Dynamics

Re-Margining and Redeploying Investor Capital
Credit Spread (bps) Yield (%) Origination 100 2.50 1,000,000 10.0 0 10,000,000 1,000,000 5.0 0 20,000,000 Spreads Tighten by 50 bps 50 2.00 1,000,000 10.0 236,783 1,236,783 12,367,830 1,000,000 5.0 491,994 1,491,994 29,839,880 Spreads Widen by 50 bps 150 3.00 1,000,000 10.0 (230,555) 769,445 7,694,450 1,000,000 5.0 (471,778) 528,222 10,564,440
Bond (Noncallable)
Initial Margin (i.e. Capital) ($) Margin Rate (% of Notional) Appreciation/Depreciation ($) New Margin Amount ($) New Exposure (Market Value) ($)
CDS protection seller

Initial margin (i.e. Capital) Margin rate (% of Notional) CDS MTM ($) New Margin Amount ($) New Exposure (Notional) ($)
Note: This analysis assumes that investors close out the original position and immediately redeploy the initial capital plus gains realized (in the case of spreads tightening) or initial capital less the loss realized (in the case of spreads widening). In the case of CDS, it is also assumed that investor capital is redeployed in a new CDS contract possibly referencing a different entity where the market spread is very close or equal to the contract spread so as to limit the impact on the analysis of any theoretical transfer of the MTM amount between investor and counterparty at the time the swap is entered into; also not considered in this analysis is any impact related to the transfer of accrued income.
Redeployment of gains build-up of credit exposure during positive environments? Re-margining losses negative cycle of losses / distressed selling / counterparty risk?
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Changes in Margin Rates During Stress

Increasing Margin Rates Under Stress: A Shock to the System?
Bond (Noncallable) Spread Widening (bps) Initial Margin (i.e. Capital) ($) MTM loss ($) Residual margin (i.e. Capital) after MTM Loss ($) Margin Rate (%) Exposure (Market Value) ($) Net Bonds Sold to Meet Margin Call ($) Stable Margin Rate 50 bps 1,000,000 (230,555) 769,445 10.0 7,694,450 (2,074,895) Dynamic Margin Rate 50 bps 1,000,000 (230,555) 769,445 20.0 3,847,225 (5,922,220)
From dealers perspective buffer to weather further spread / counterparty erosion For margined investors amplifies de-leveraging and liquidity pressures Appears to pose more of a risk for leveraged bond investors
Margin rates may be reset at relatively short intervals (i.e., term of securities financing) For bilateral CDS, fixed initial margin rate for life of the contract however, can (in effect) increase if counterpartys financial condition weakens (i.e., lowering of margining threshold, or unsecured credit exposure available)
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Systemic Implications
Three potential sources of pro-cyclicality:
Low initial margin rates (i.e., investors can build large positions) Re-margining (i.e., investment losses and gains can be magnified) Changes in margin rates under stress (increase in collateral buffers might inadvertently trigger liquidity pressure)
Even cash investors that do not employ leverage can be exposed to pricing volatility stemming from reliance by some investors on margin financing
CDS spread volatility (which might partly be explained by margin rates) could create negative feedback loop for some issuers
If financial reforms / movement to CCP were to result in higher margin requirements, CDS leverage would likely be reduced
less spread volatility?
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Appendix: Select Research on Other Topics

US Money Fund Exposure to European Banks Burden-sharing Samples Used in CDS Analysis
MMFs Reduced Exposure Prior To Recent Volatility

MMF Exposure to European Banks
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% (as % of total assets under m anagem ent for ten largest MMF) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
2H 06
1H 10
1H 07
Ireland Portugal Europe total (right axis)
2H 07
1H 08
2H 08
Spain Italy UK, France, Germany (right axis)
Source: U.S. Money Market Funds: Recent Trends in Exposure to European Banks (Fitch Macro Credit Research, December 10, 2010)
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2H 10
1H 09
2H 09
30
Regional Variation in MMF Exposure to Banks
MMF Exposure to Bank CDs and CP (as % of total MMF assets under management)
2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10 2H10 Ireland 0.4% 0.3% 0.6% 1.5% 0.5% 0.0% 0.4% 0.0% 0.0% Italy 1.2% 0.7% 0.7% 2.3% 2.7% 3.0% 3.2% 1.9% 1.8% Portugal 0.0% 0.0% 0.1% 0.0% 0.0% 0.5% 0.3% 0.0% 0.0% Spain 0.4% 0.3% 1.3% 2.2% 3.2% 3.0% 2.9% 1.7% 1.3% UK 8.8% 8.1% 10.4% 8.3% 8.4% 8.3% 8.1% 7.0% 6.4% France Germany Benelux 7.5% 6.2% 4.6% 7.0% 5.9% 5.2% 6.1% 3.5% 6.2% 8.1% 2.3% 5.0% 9.8% 1.8% 4.7% 13.5% 3.1% 5.6% 14.4% 4.4% 6.9% 10.8% 4.6% 6.0% 11.9% 4.3% 6.6% Swiss 2.1% 4.0% 3.4% 1.9% 1.9% 1.9% 0.9% 1.2% 1.5% Nordic 2.0% 1.9% 2.6% 2.4% 3.0% 3.8% 4.6% 4.6% 4.9% Europe (total) 34.2% 33.9% 35.1% 34.9% 36.0% 42.7% 46.1% 37.5% 38.7% North Japan Oceania America 2.6% 1.1% 11.4% 2.1% 1.5% 10.7% 1.7% 1.5% 14.1% 1.1% 2.6% 10.0% 0.8% 3.1% 14.5% 3.5% 3.2% 10.7% 4.6% 5.3% 8.2% 4.0% 4.8% 8.5% 4.9% 5.4% 7.0%
Note: Europe (total) column in table above does not necessarily equal the exact sum of the European countries listed because of (1) rounding errors and (2) the exclusion of countries to which the MMFs sampled were not highly exposed over the observation period.
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Changes in the Largest Single-Name Bank Exposures

As of 2H 2007
Citibank Barclays JP Morgan Chase HBOS Societe Generale Bank of America UBS ABN AMRO Bank RBS Fortis Bank
% of Total MMF assets

3.6% 3.4% 2.7% 1.9% 1.9% 1.9% 1.7% 1.7% 1.5% 1.4%
As of 2H 2010
BNP Paribas Rabobank Credit Agricole ING Natixis Westpac Societe Generale RBS Nordea Bank HSBC
% of Total MMF assets

3.1% 3.0% 2.8% 2.5% 1.9% 1.9% 1.7% 1.5% 1.3% 1.3%
% of exposure represented by Certificates of Deposits (CD): Citibank (as of 2H 2007): 8% BNP Paribas (as of 2H 2010): 91%
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Burden-sharing: External Support vs. Hybrids / Sub Debt

(EUR billio n) 1 200 1 000 800 600 400 200 0 Glo bal P ublic Secto r Capital Suppo rt B ank Risk Capital If Equity Co nversio n Subo rdinated Debt 660 Hybrids 360 1 1 ,1 0 1 ,020
Note: figures in chart are in (1,000,000) Source: Burden Sharing: Who Pays Next Time? (Fitch Macro Credit Research, May 10, 2010)
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Appendix: Sample for US CDS Analysis

Bank Bank of America Corporation Bank of New York Co Inc. Bank One Corporation BB&T Corporation Canadian Imperial Bank of Commerce Capital One Financial Corporation Citigroup Inc. Fifth Third Bancorp JPMorgan Chase & Co. KeyCorp Marshall & Ilsley Corp Mellon Financial Corporation National Bank of Canada National City Corp PNC Financial Services Group, Inc Popular, Inc. Royal Bank of Canada Sovereign Bancorp, Inc. State Street Corporation SunTrust Banks Toronto Dominion Bank U.S. Bancorp Wachovia Corporation Washington Mutual Incorporated Wells Fargo & Co Insurance Aetna Inc. AFLAC Incorporated Allstate Corporation American Financial Group, Inc. American International Group Inc. Anthem Insurance Companies Inc. Assurant Inc. AXA Financial Inc. Berkshire Hathaway Inc. Chubb Corporation CIGNA Corporation First American Corporation Genworth Financial Inc. Hartford Life, Inc. Horace Mann Educators Corp John Hancock Financial Services Inc. Liberty Mutual Insurance Companies Lincoln National Corporation Manufacturers Life Insurance Company Markel Corporation Marsh & McLennan Companies, Inc. Massachusetts Mutual Life Insurance Company MetLife, Inc. Nationwide Financial Services, Inc. New York Life Insurance Company Pacific Life Insurance Co Principal Financial Group Prudential Financial Inc. Safeco Corporation The Progressive Corporation The St. Paul Travelers Group of Companies, Inc. Torchmark Corporation Unitrin, Inc Monoline Ambac Financial Group, Inc. Assured Guaranty Corp. FGIC Corporation Financial Security Assurance Inc. MBIA, Inc. MGIC Investment Corporation Radian Group Inc. The PMI Group, Inc. REIT AMB Property LP Archstone-Smith Operating Trust Avalon Bay Communities BRE Properties, Inc. Camden Property Trust Developers Diversified Realty Corporation Duke Realty LP Equitable Resources, Inc. Equity One Inc Federal Realty Investment Trust First Industrial LP Health Care Property Investors, Inc. Health Care REIT, Inc. Healthcare Realty Trust Incorporated Highwoods Realty LP Hospitality Properties Trust HRPT Properties Trust iStar Financial Inc. Kimco Realty Corporation Liberty Property LP Mack-Cali Realty Corporation National Retail Properties Inc New Plan Excel Realty Trust, Inc. (acquired by Centro in 2007) ProLogis Regency Centers, L.P. United Dominion Realty Trust, Inc. Vornado Realty Trust Washington Real Estate Investment Trust Weingarten Realty Investors Home Builder Centex Corporation D R Horton Inc. Lennar Corporation M.D.C. Holdings, Inc. NVR Inc Pulte Homes, Inc. Ryland Group, Inc. Toll Brothers, Inc.
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Appendix: Sample for EUR CDS Analysis

Bank ABN AMRO Bank NV Banca Intesa SpA Banco Bilbao Vizcaya Argentaria SA Banco Santander Central Hispano Bank of Scotland Barclays Bank plc Bayerische Landesbank Girozentrale BNP Paribas Commerzbank AG Credit Agricole SA Credit Suisse Group Danske Bank AS Deutsche Bank AG Fortis SA/NV HSBC Holding plc ING Bank NV Lloyds TSB Group plc Natixis National Westminster Bank plc Nordea Bank AB Rabobank Nederland Royal Bank of Scotland plc Societe Generale UBS AG Unicredito Italiano SpA Insurance Aegon N.V. Allianz AG Assicurazioni Generali SpA Aviva Plc AXA Hannover Rueckversicherungs-AG ING Groep NV Legal & General Group plc Munich Re Old Mutual Plc Prudential plc Royal & Sun Alliance Insurance plc SCOR Standard Life Assurance Company Swiss Life Holding Swiss Reinsurance Co Zurich Financial Services AG
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Disclaimer
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2/15/2011
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CDS Spreads As Default Risk Indicators - Feb 2011

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CDS Spreads As Default Risk Indicators - Feb 2011

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Why Study CDS Spreads?

Source: Fitch Ratings, Fitch Solutions.

Margining: A Closer Look

Appendix: Select Research on Other Topics