<p><br/></p><p><font size="4">The increasing ability to trade credit risk in financial markets has facilitated its dispersion<br/>across the financial and other sectors. However, specific risks attached to credit risk transfer<br/>(CRT) instruments in a market with still-limited liquidity means that its rapid expansion may<br/>actually pose problems for financial sector stability in the event of a major negative shock to<br/>credit markets. This paper attempts to quantify the exposure of major U.K. financial groups<br/>to credit derivatives, by applying a vector autoregression (VAR) model to publicly available<br/>market prices. Our results indicate that use of credit derivatives does not pose a substantial<br/>threat to financial sector stability in the United Kingdom. Exposures across major financial<br/>institutions appear sufficiently diversified to limit the impact of any shock to the market,<br/>while major insurance companies are largely exposed to the “safer” senior tranches.</font></p>