Credit Default Swaps and Bank Risk-Taking

Shan, Susan Chenyu; Tang, Dragon Yongjun; Hong, Yun–Chul

doi:10.2139/ssrn.2348166

Cited by 2 publications

(7 citation statements)

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“…If CDS trading replaces existing risk management tools, it is unlikely to have a strong impact on credit supply by banks and on loan contract terms. This is consistent with existing studies, which find mixed e ects of CDS trading on credit markets (Hirtle (2009); Ashcraft and Santos (2009) ;Saretto and Tookes (2013);Shan et al (2014)). 2…”

Section: Introductionsupporting

confidence: 92%

“…Saretto and Tookes (2013) document that firms with CDS traded on their debt maintain higher leverage ratios. Shan et al (2014) provide evidence that firms with actively traded CDS on their debt obtain larger loans than non-CDS firms. If this is the case, the e ect of CDS trading on primary loan market allocation may be even more prominent than documented so far.…”

Section: Does the E Ect Of Cds Trading On Loan Syndication Vary Withmentioning

confidence: 93%

“…The enhanced risk-sharing via credit default swaps (CDS) can alleviate credit supply frictions (Saretto and Tookes (2013); Shan et al (2014)). However, a necessary condition for any positive e ect of CDS trading is that creditors actively use CDS to manage credit risk.…”

Section: Introductionmentioning

confidence: 99%

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The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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We analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.Keywords: Loan Sales, Credit Default Swaps, Syndicate Structure, Syndicated Loans JEL-Classification: G21, G32ú Daniel Streitz is from the Institute of Corporate Finance at Humboldt University Berlin. The author would like to thank Tim Adam, Tobias Berg, Valentin Burg, Sudipto Dasgupta, Hermann Elendner, Xavier Giroud, Laurenz Klipper, Augustin Landier, Christian Laux, Gustavo Manso, Martin Oehmke, Steven Ongena (the editor), Gordon Phillips, Tobias Scheinert, Sascha Ste en, Alex Stomper, Gunter Strobl, and an anonymous referee for helpful comments and suggestions. Some of the work on this paper was completed while the author was visiting USC Marshall School of Business. The author gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft through SFB 649 "Economic Risk" and SFB-TR15 "Governance and the E ciency of Economic Systems". Send correspondence to Daniel Streitz, Institute of Corporate Finance, Dorotheenstrasse 1, 10099 Berlin, Germany; E-mail: daniel.streitz@wiwi.hu-berlin.de. The Impact of Credit Default Swap Trading on Loan Syndicationú February 2, 2015 AbstractWe analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.

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Section: Introductionsupporting

confidence: 92%

Section: Does the E Ect Of Cds Trading On Loan Syndication Vary Withmentioning

confidence: 93%

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The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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“…This indicates that CDSs can be used by banks to lower capital ratios, a phenomenon known as regulatory arbitrage and discussed later in this paper. In addition, Shan et al ., () find that loans issued to CDS‐referenced borrowers are larger and have higher yield spreads, provided the lead banks in the syndicate are actively trading in CDSs, compared with non‐CDS‐referenced borrowers. These economic realities justify the importance of examining views on the impact of use of CDSs in the banking industry.…”

Section: Why Focus On the Banking Industry?mentioning

confidence: 96%

“…However, Shan et al . () find that banks become more aggressive once they use CDSs and that this increase in bank risk‐taking is due to trading in CDSs. They also find that both total and tier 1 capital ratios (capital adequacy ratios as required by the Basel accord) are lower for CDS‐active banks compared with CDS‐inactive banks.…”

Section: Why Focus On the Banking Industry?mentioning

confidence: 99%

Credit Default Swaps: Has the GFC Influenced Perceptions of Their Utility for Banks?

Dias

2015

Journal of Economic Surveys

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Credit Default Swaps (CDSs) are considered as one of the most versatile financial innovations of the 21st century. Since its inception, the credit derivatives market has grown to a peak of $64 trillion in 2008 in terms of gross notional values (Cont, ). However, after the onset of the GFC, this market has decreased to a large extent. While there is evidence that promotes the risk reduction properties of CDSs, there is a growing body of research post GFC that identifies destabilising effects of these instruments. In this paper, I review the relevant scholarly literature and provide evidence of how the views on CDSs have changed post GFC due a deeper investigation of issues such as systemic risk, regulatory arbitrage, information asymmetry and risk‐taking, among others, in the banking industry. This paper provides a survey of the literature of views ‘for’ and ‘against’ the use of CDSs during pre and post GFC periods and finally concludes that in comparison to the pre GFC period, post GFC there is a significant increase in the literature that highlights the detrimental nature of CDSs.

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Credit Default Swaps and Bank Risk-Taking

Cited by 2 publications

References 0 publications

The Impact of Credit Default Swap Trading on Loan Syndication *

The Impact of Credit Default Swap Trading on Loan Syndication *

Credit Default Swaps: Has the GFC Influenced Perceptions of Their Utility for Banks?

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