Bank and Broker Default Risk

Includes: IYF, KBE, XLF
by: Bespoke Investment Group

We created a Bank and Broker CDS (credit default swap) Index during the financial crisis to track default risk for the financial sector, and we continue to monitor the index on a regular basis. The cap-weighted index tracks CDS prices for the major banks and brokers around the world. Below (click to enlarge) is a chart of the Bank and Broker CDS Index going back to January 2009 combined with a chart of the S&P 500 Financial sector.

As the Financial sector fell from March through June of this year, our CDS index rose, but not by as much as one might expect. The index pulled back slightly as the market bounced from 6/24 through 7/7, and it has barely moved higher in recent days even as the Financial sector continues to struggle. While sovereign debt issues across the globe have caused CDS for specific countries to spike significantly in 2011, at least credit traders have kept things quiet (so far) in the financial sector.

Click to enlarge