Nov. 13 (Bloomberg) -- Treasury Secretary Henry Paulson's decision to abandon the purchase of toxic mortgage-linked securities under the Troubled Asset Relief Program may trigger a return of systemic risk to credit markets, BNP Paribas SA said.

``Substantial risk still remains within the U.S. financial system,'' said Rajeev Shah, a London-based credit strategist at BNP Paribas. ``Uncertainty about existing troubled assets could lead to increasing systemic risk.''

Paulson moved the focus of the $700 billion TARP program yesterday to help relieve pressures on consumer credit including auto loans and credit card debt. Shares of Citigroup Inc. and Goldman Sachs Group Inc. tumbled more than 10 percent as a result, according to Shah, on investor concern holdings of mortgage-related assets will cause further losses.

The Treasury Secretary's decision not to save Lehman Brothers Holdings Inc. from bankruptcy in September sparked a surge in the cost of protecting corporate debt from default amid investor concern the financial system could be irrevocably damaged.

``Solvency issues could come back into play,'' Shah said in an interview. ``The TARP has not helped to spur lending.''

CDX Index

Credit-default swaps on the benchmark Markit CDX North America Investment Grade index rose to a record 240 on Oct. 27. The index declined 1.5 basis points to 197.5, according to broker Phoenix Partners Group prices at 8:26 a.m. in New York.

The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Residential and commercial-mortgage backed bonds tumbled after Paulson's about-turn on the TARP program. All 24 of the ABX indexes of credit-default swaps tied to subprime mortgage bonds fell to new lows, according to Markit Group Ltd. One of them, known as ABX-HE-PENAAA 07-2 linked to AAA rated bonds created in the first half of 2007, dropped 8.4 percent to 41.83. The level suggests the bonds might fetch about 42 cents for each dollar of balances.

Financial companies worldwide have lost or written down $950 billion since the start of the credit crisis, according to data compiled by Bloomberg.

The cost of default protection on European bank bonds was little changed today with the Markit iTraxx Financial index of credit-default swaps liked to 25 banks and insurers dropped 2 basis points to 112, according to JPMorgan Chase & Co. prices. The Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 9 basis points to 830.5.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

To contact the reporter on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: November 13, 2008 08:36 EST