GOOD NEWS: If A European Sovereign Default Triggers CDS, Then US Banks Would Come Out On Top

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U.S. financial institutions would be net recipients of credit default swap payouts in the event of a large-scale European sovereign default, Federal Reserve Chairman Ben Bernanke will tell Congress tomorrow.U.S. firms have moved to allocate offsetting capital, he says.

However, American banks’ exposure to stress in Europe’s banking sector remains a “concern.”

The fear, he says, is that CDS counterparties could squelch on their obligations, he says, adding that with European holdings of 35%, prime money market funds remain “structurally vulnerable.”

Bernanke says that risk is mitigated, although his reasoning is not entirely comforting given the now-dubious role of size in the banking sector. 

“Counterparties to large U.S. dealer banks for sovereign CDS trades are dispersed, primarily across large financial institutions,” he says.

Read Bernanke’s full prepared testimony here.

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