The easing of credit standards witnessed in recent years has for some time left its mark on the US mortgage market in the form of rising default rates among debtors with poorer credit ratings. A large part of the credit risk arising from subprime mortgages is to be found in securitised and structured form at institutional investors. These include hedge funds.
News reports over the past few days have made this patently clear. It is my view , however, that in terms of the market as a whole such relatively minor distortions do not yet constitute a systemic risk. Nevertheless, they do raise the fundamental question of how these securitised credit risks should be assessed.