Arthur Kimball-Stanley

Abstract

This article focuses on the potential moral hazards created by the use of credit default swaps (“CDS”) and argues that such swaps may warrant regulation analogous to traditional insurance regimes. The author critiques academic mischaracterizations that CDS is fundamentally different from insurance, refuting these arguments by comparing the original rationales for regulating insurance with the moral hazards inherent in credit risk–transfer practices like CDS. Several concrete examples—drawn from investment bank behavior, scholarship on insurance contracts, issues of control, regulatory value, and underlying risk structures—are used to illustrate these parallels. Ultimately, the author contends that, given the significant similarities and comparable risks between CDS and traditional insurance, regulatory approaches for CDS should be seriously explored.

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