An emerging type of derivative product may enable lenders to increase returns and the availability of credit while decreasing systemic risk. These products, known as credit derivatives, address a core function of banking - extending credit.

Credit derivatives unbundle and replicate the credit attributes of a debt instrument and allow a lender to transfer (for a price) certain customized credit risks to other parties. While new and innovative, they are actually extensions of the concepts underlying such traditional products as loan participations and standby letters of credit.

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