According to Sir Alan Greenspan credit derivatives have reduced the risk that (individual) banks will fail in times of recession like the present. He says

“Improved risk management and technology have also facilitated, of course, the growth of markets for securitized assets and the emergence of entirely new financial instruments–such as credit default swaps and consolidated debt obligations. These instruments have been used to disperse risk to those willing, and presumably able, to bear it. Indeed, credit decisions as a result are often made contingent on the ability to lay off significant parts of the risk. Such dispersal of risk has contributed greatly to the ability of banks–indeed of the financial system–to weather recent stresses. More generally, the development of these instruments and techniques have led to greater credit availability, to a more efficient allocation of risk and resources, and to stronger financial markets. (emphasis added)”

But the safety of individual institutions has been purchased at the cost of increasing the risk of systemic collapse. What if the presumption that the holders of credit derivatives are able to bear the risk turns out to be wrong?