when a borrower defaults, the bank now suffers a loss only when both a borrower and its credit derivative counterparty default. the risk of simultaneous default is certainly much lower than the risk of a single default. credit derivatives, while making markets more complete, are not a panacea and must be used wisely. most credit derivatives require the counterparty to make a payment to the bank when a credit loss or default occurs. for this type of credit derivative, traditional credit risk may reappear as counterparty credit risk, that is, the risk that the bank ’ s counterparty will not fulfill its agreement to compensate the bank in case of a credit loss. the price of a credit derivative should take into consideration the credit risk posed by the seller of the protection and the appropriate default correlation, though default correlations are difficult to estimate precisely. but some credit derivatives, such as credit - linked notes, are prefunded - - the counterparty pays the principal up front and the repayment it receives at maturity is contingent on a credit event not occurring. banks selling these funded credit derivatives have no counterparty credit risk at all. recognizing that they must understand the characteristics of new risk - sharing mechanisms, several regulatory bodies have taken a close look at the credit derivatives market in recent years. the federal reserve, in its role as a bank supervisor, monitors banks ’ participation in the credit derivatives market. in addition, the u. k. financial services authority and the bank of england have issued reports on credit derivatives in recent years. thanks to these efforts, we have a much better picture of the credit derivatives market than we did a year or two ago. these groups have all reported that they find no evidence that the credit derivatives market threatens financial stability. the nonbank firms that are active in the credit derivatives market, notably some insurance companies, do appear to understand the nature of the risk they are taking on. although regulatory capital arbitrage was cited as a factor spurring the early growth of the credit derivatives market, the increasingly active portfolio management of credit risk, by both banks and insurance companies, has driven growth of the market in recent years. even at this relatively early stage in their life cycle, credit derivatives do appear to offer benefits. the creation of a market for credit risk transfer has probably enhanced efficiency and economic resiliency by enabling credit risk to be dispersed throughout the financial system. credit risk diversification using credit derivatives is thought by many to be one factor that has helped

andreas dombret : current developments in germany and europe welcome address by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the reception for the outgoing deputy head of the representative office of the deutsche bundesbank, new york, 24 august 2011. * * * introduction ladies and gentlemen for more than four years we have been facing an unprecedented crisis, which has sometimes led to high levels of uncertainty. i will start my short speech with some information on the current situation in germany and europe before returning to the individuals and their role in transmitting such information. let me stress in this context that it is a pleasure to be meeting all of you today and to have this opportunity to improve our transatlantic relationships and to exchange views later on. current situation in germany and europe as i mentioned, we have been living in the face of an extraordinary crisis for more than four years. having originated from the american housing market, this crisis quickly spread to the global financial markets. it caused a severe recession of the real economy and eventually led to an erosion of confidence in the public finances of various countries. in the wake of debt problems and amidst worries about the state of the global economy, we have seen renewed market turbulences over the past weeks. however, looking at the underlying development of the real economy, the situation in germany and the euro area is not as dire as these turbulences might suggest. let us begin by taking a look at the situation in germany. gdp as the most general indicator of a nation ’ s economic performance has broadly recovered. during the crisis the german economy shrank considerably ; in 2009 alone, gdp contracted by 5. 1 % – by far the most severe downturn for more than half a century. however, in 2010 and the first quarter of 2011, the german economy recovered strongly and the level of economic activity has almost returned to pre - crisis levels by now. these strong dynamics seem to be contrasted by the first estimate of gdp growth in the second quarter of this year which revealed an increase of just 0. 1 % compared to the first quarter. nevertheless, this pronounced drop in the growth rate does not come as a surprise and should be no cause for concern : the strong expansion we saw in the first quarter was in part due to catch - up effects, since the last quarter of 2010 had been adversely affected by an exceptionally cold winter. hence, a certain backlash in the second quarter was to be expected, and in its recent june forecast the bun