Swap Spreads Reflect Concern Over Counterparty Risk – BIS

The latest BIS Quarterly Review notes that investor confidence in the global financial markets was further undermined in the second and third quarters of 2002 by a series of ‘disconcerting events’. The Bank for International Settlements highlights financial restatement in late June by WorldCom as the most significant of these events as fear of more widespread corporate problems precipitated a slump in equity markets in both the United States and Europe. According to the report, banks in Europe and finance companies in the United States not only lost market value but also saw the spreads on their senior debt widen sharply. ‘Even swap spreads began to reflect the concern of market participants over the counterparty risk of dealing with large money centre banks. These developments threatened to constrain financial intermediation, possibly adding to the difficulties of non-financial firms in raising money’ the bank added.


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