Vladimir AgeevPublished in:
Global Markets and Financial Engineering (Russian version)
– Volume 2, Number 3 (July-September, 2015)

JEL classification: C58, G21, G32

Keywords: credit default swap, default, financial derivative, models of credit risk assessment, risk management, solvency


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Abstract:

The article continues the author’s previous publication “The applicability of CDS for assessing the sol-vency of financial institutions in the Russian Federation” concerning the usage of Credit Default Swaps (CDS) for evaluation of counterparty risk by Russian financial institutions and companies. In the pre-sent article, the author develops a model for evaluation of theoretical values of CDS spreads for banks in the group of developing countries BRICS, CDSs on the debt of which are not traded in the market. This model is based on daily changes in the spread of sovereign CDS, indicators of bank financial reports and variables that characterize certain features of analyzed banks. The obtained CDS spreads are compared with their real values for the banks, CDSs on the debt of which exist. Possible options for the usage of obtained theoretical CDS spreads are reviewed for evaluation of the chance of default of Russian financial institutions’ and companies’ counterparties.

Highlights:

► Ratings assigned by the International Rating Agencies have certain drawbacks, since there is a time lag between the financial data analysis and rating assignment; besides, so far, only the minority of the existing banks have been rated
► the advantage of CDS consists in the fact that it’s constantly appraised by the market participants taking into account not only the data from banks’ financial statements, their credit rating and other fundamental assessments, but all the available information in real time as well
► Modern risk evaluation models can be based not only on the information about the CDS that trade in the market, but also on the development of CDS theoretical values for counter – agents in case such tools are not present in the market at the moment
► According to the evaluation results, the spread value of an CDS banks is influenced by the following factors: sovereign CDS spread of the country represented by the bank under analysis, the risk of its default, several factors characterizing the bank – the presence or absence of the state participation in the share capital, the company’s country of origin and certain financial data from the bank’s financial statements: change of one or another amount of assets (inverse relationship with the CDS spread) and the share of the remaining operating profit in assets (direct relationship)
► The obtained CDS evaluations can be used to assess the counterparty banks’ default risk and to impose maximum permissible credit risk limits on them

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