Bankers fear sovereign risk in 2010

In normal circumstances, the question of how banks manage their collateral deals with other financial players is not of interest to ordinary mortals.

However, these are not normal times. In the past couple of years the risk managers of the world’s largest banks have been forced to confront a series of shocking situations, as seemingly remote events, or “tail risks” as they are dubbed, have come to pass.

So, unsurprisingly, those same risk managers are now scouring the horizon for any fresh potential shocks. And as they run scenarios for 2010 – or “try to imagine six impossible horrible things before breakfast”, as one says – an issue that is causing more unease is the matter of sovereign risk, and the related issue of collateral.

Until quite recently, this was not something that banks worried much about in the western world, since it was widely assumed that the credit standing of European countries and the US was ultra secure. (more)