The broader issue The current financial crisis has highlighted some of the risks associated with this financial system complexity – and the complications they bring for monetary policy are far from the only ones. Those charged with designing and implementing policies for prudential supervision, market conduct and deposit insurance, among others, are thinking hard about how to refine them.
U.S. financial institutions do have some gross exposure to potential losses arising from sales of credit default swap (CDS) protection referencing European sovereign debt. However, for the large U.S. dealer banks, these sales have been more than offset by purchases of protection, which would imply that in the event of a sovereign default, U.S. financial institutions would be net recipients of CDS payouts.