Credit swap means an agreement between two or more lenders (say two or more banks) where they agree to exchange a portion of their customers loan payments to each other to diversify away some of their credit risk.
An example of credit swap in the following:
A & B are two Banks. They find a swap dealer, such as large insurance company. The swap dealer (an intermediately firm) such as large insurance company agrees to draw up a credit swap contact between two banks.
- Bank A transmits an amount say $100m in interest and principal payment that it collects from its credit customer to dealers.
- Bank B transmit all or a portion of its loan payments it customer makes to same dealer.
- The swap dealer will ultimately pass these payments along to the other banks i.e. Bank A.
More from this Section
- Hierarchical mandate
Hierarchical mandate is a mandate for the central bank that puts the goal of price stability ...
- Fixed exchange rates
Fixed exchange rates refer to the foreign exchange rates tied to the currency of a major ...
- Pegged exchange rate
Pegged exchange rate— exchange rate whose value is pegged to another currency’s value ...
- Life annuity with guaranteed payments
Life annuity with guaranteed payments refer pays a life income to the annuitant with a ...
- Yield Interest Rate
Yield Interest Rate is the actual rate of interest expressed as a rate percentage per ...