A Cascade Of Poorer Loans?

An answer to an earlier post using Credit Default Swaps as an illustration. From Vox, by Virginie Coudert Mathieu Gex :

"The CDS market is now in the eye of the storm. The reason is straightforward, because this crisis is about credit risk. A credit bubble has ballooned for years, being enhanced by the existence of credit derivatives. As credit originators can pass their risk to other agents, they have been less careful about the quality of their loans. In that sense, CDS have given an incentive for distributing more credit to more risky borrowers."

So that explains lending to people who might not pay you back.

And, on no regulation as opposed to minimal and effective regulation:

"Another cause for concern is that the market is unregulated. CDSs act as insurance against default, but they are not submitted to any regulations as is the case for insurance companies. The latter have to meet required reserves and are closely monitored by public authorities. On the CDS market, no reserves are required from the sellers of protection, only very thin margins, ranging from 2% to 5% of the amount insured. However, the danger is even greater than insuring against natural catastrophes for example, because of the high correlation of default risk, which is linked to the business cycle."

Seems pretty clear.