Tighter CDS spreads hit Q3 results for banks

Tightening CDS spreads on Morgan Stanley debt hit the bank’s third-quarter results, but it was not the only bank to have suffered.

Morgan Stanley announced a $757 million profit for the third quarter on October 21, compared with a loss of $159 million in the second quarter. However, it said, it had taken a $0.9 billion loss as CDS spreads referencing the bank’s own debt narrowed further.

Own credit risk, the concept of including the credit risk of an institution in the measurement of the liabilities it issues, which has had a significant impact on banks’ profits in the first two quarters of 2009, has continued to affect results in the third quarter as bank CDS spreads have narrowed further.

Morgan Stanley recorded fair value losses of $1.5 billion and $2.3 billion in the first and second quarters of 2009 respectively, as a result of narrowing spreads. In the third quarter, the narrowing of spreads affected the most profitable business of the bank. It generated net revenues of $2.1 billion in fixed-income sales and trading, despite an own-credit loss of $0.6 billion, while in equity sales and trading, net revenues of $1.1 billion included a $0.2 billion own credit loss.

Other banks to have suffered from a narrowing of spreads include JP Morgan and Goldman Sachs.