Credit Derivatives, Disintermediation and Investment Decisions

Morrison, Alan D.

doi:10.2139/ssrn.270269

Cited by 117 publications

(128 citation statements)

References 35 publications

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“…This result is in contrast to Morrison (2003), who …nds that CRT tends to cause disintermediation. We conjecture that the di¤erence in results obtains because in Morrison's model banks incur a …xed cost of monitoring and that the e¤ort choice is discrete (to monitor or not to monitor).…”

Section: Lemmacontrasting

confidence: 81%

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Credit Risk Transfer and Financial Sector Performance

Marsh

Wagner

2004

SSRN Journal

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In this paper we study the impact of credit risk transfer (CRT) on the stability and the e¢ ciency of a …nancial system in a model with endogenous intermediation and production.Our analysis suggests that with respect to CRT, the individual incentives of the agents in the economy are generally aligned with social incentives. Hence, CRT does not pose a systematic challenge to the functioning of the …nancial system and is generally welfare enhancing.However, we identify issues that should be addressed by the regulatory authorities in order to minimize the potential costs of CRT. These include: ensuring the development of new methods of CRT that allow risk to be more perfectly transferred, setting regulatory standards that re ‡ect di¤erences in the social cost of instability in the banking and insurance sector; promoting CRT instruments that are not detrimental to the monitoring incentives of banks.JEL classi…cations: E44, G21, G22, G28

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Section: Lemmacontrasting

confidence: 81%

“…3 This con…rms results in Morrison (2003). However, in contrast to Morrision we …nd that these e¢ ciency losses do not necessarily cause disintermediation in the banking sector.…”

supporting

confidence: 53%

Credit Risk Transfer and Financial Sector Performance

Marsh

Wagner

2004

SSRN Journal

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“…On 10 For models that highlight the importance of the monitoring function of banks see for example Campbell and Kracaw (1980), Diamond (1984), Ramakrishnan and Thakor (1984) and Fama (1985). Morrison (2005) makes this point precisely with respect to CDS.…”

Section: Introductionmentioning

confidence: 99%

Has the CDS market lowered the cost of corporate debt?

Ashcraft

Santos

2009

Journal of Monetary Economics

283

164

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There have been many claims that credit derivatives like credit default swaps (CDS) have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors. However, these instruments also give banks an opaque means through which to sever links to their borrowers, reducing lender incentives to screen and monitor. In this paper, we evaluate the impact that the onset of CDS trading has on the spreads that underlying firms pay at issue in order to raise funding in the corporate bond and syndicated loan markets. Employing matched-sample methods, we fail to find evidence that the onset of CDS trading affects the cost of debt financing for the average borrower. However, we do uncover economically significant adverse effects on risky and informationally-opaque firms. It appears that the onset of CDS trading reduces the importance of the lead bank's retained share in resolving any asymmetric information problems that exist between the lead bank and the participants in a loan syndicate. On a positive note, we do find a small positive impact of CDS trading on spreads at issue for transparent and safe firms, where the lead bank's share is much less important. Moreover, we document that the benefit of CDS trading on spreads increases once the market becomes sufficiently liquid. In the end, this financial innovations has increased the completeness of markets, but at the same time has created new problems by reducing the effectiveness of lead banks' loan shares as a monitoring commitment device.

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“…The first strand of this literature considers the impact of credit risk transfer on the allocation of resources when there is asymmetric information. Morrison (2003) shows that a market for credit derivatives can destroy the signalling role of bank debt and lead to an overall reduction in welfare as a result. He suggests that disclosure requirements for credit derivatives can help o set this e ect.…”

Section: Introductionmentioning

confidence: 99%