Credit risk transfer and financial sector stability

Wagner, Wolf; Marsh, Ian W.

doi:10.1016/j.jfs.2005.11.001

Cited by 99 publications

(38 citation statements)

References 17 publications

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“…Furthermore, the Dodd-Frank Act requires that the deposit insurance fund reserve ratio reach 1.35 percent by 2020 (the actual reserve ratio is 0.45 percent in 2012), as noted earlier. Our result suggests that the incentive of an individual bank to transfer credit risk with credit derivatives is aligned with the regulatory objective of reducing risk taking, which is consistent with the finding of Wagner and Marsh (2006).…”

Section:  supporting

confidence: 88%

“…The indirect effect is insufficient to offset the direct effect to give an overall negative response of bank default risk to an increase in credit risk hedging. Our results are largely consistent with the empirical findings of Cebenoyan and Strahan (2004) and Wagner and Marsh (2006). A further contribution of this paper is that it shows that deposit insurance fund protection reinforces this overall negative response of bank default risk that meets the requirement of the Dodd-Frank Act.…”

Section: Introductionsupporting

confidence: 88%

“…As a result, we show that an increase in the credit risk hedging decreases the default risk in the bank's equity return. Our result can be used to explain the aforementioned findings of Wagner and Marsh (2006). Table 7.…”

Section:  mentioning

confidence: 72%

“…Overall, the literature to which our work is most directly related is that on conformity, particularly Wagner and Marsh (2006). Other examples are Maudos and de Guevara (2004), Williams (2007), Episcopos (2008), Bedendo and Bruno (2012), and Pausch and Welzel (2012).…”

Section: Related Literaturementioning

confidence: 99%

“…Not surprisingly, credit risk transfer activities help manage bank risk (Cebenoyan and Strahan, 2004). Wagner and Marsh (2006) also suggest that the incentive of banks to transfer credit risk is aligned with the regulatory objective of improving stability, and so the recent development of credit derivative instruments is to be welcomed. However, Bedendo and Bruno (2012) demonstrate that the contribution of credit risk transfer with credit swaps to the 2007-2009 financial turmoil has been widely debated.…”

Section: Introductionmentioning

confidence: 99%

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Credit Risk Hedging, Deposit Insurance Fund Protection, and Default Risk in Retail Banking during a Financial Crisis

Chen

Lin²

2015

RWE

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The barrier options theory of corporate security valuation is applied to the contingent claims of a regulated bank. The regulator/insurer of the bank owns a down-and-in call option on the bank's assets which can be balanced against the expected coverage cost. This paper examines how the bank's credit risk hedging operation affects its spread behavior and performance and how these effects vary at various levels of the regulatory insurance fund protection. We find that an increase in the bank's credit risk hedging has a negative effect on its loan rate, deposit rate, default risk, and liability value. The regulatory deposit insurance fund protection reinforces the reduction in bank default risk, thereby contributing to the stability of the banking system. The insurance fund protection with credit risk hedging confirms the requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Section:  supporting

confidence: 88%

Section: Introductionsupporting

confidence: 88%

Section:  mentioning

confidence: 72%

Section: Related Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Credit Risk Hedging, Deposit Insurance Fund Protection, and Default Risk in Retail Banking during a Financial Crisis

Chen

Lin²

2015

RWE

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Securitization and CDS in U.S. bank lending

Tommaso

2020

Int. J Fin Econ

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Using a sample of quarterly observations of U.S. bank holding companies (BHCs), we investigate the effect of securitization and CDS on credit supply. Furthermore, we test the hypothesis that securitization and CDS have a different effect on the U.S. bank's lending. The use of CDS and securitization boosts lending cyclicality, reduces the credit supply and amplifies the cyclicality of bank credit supply, particularly in period of financial stress. Furthermore, the worst effect on U.S. bank lending is caused by the use of CDS. We find empirical evidence of effects of CDS and securitization on the bank lending channel following changes in monetary policy.

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How Does NPLs Securitization Affect EU Banks’ Systemic Risk?

Dell’Atti,

Di Tommaso,

Onorato

et al. 2024

New Economic Windows

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This chapter contributes to the growing debate on the NPLs issue by addressing the challenges leading to financial stability and promoting the NPLs resolution plans for EU banks. Our main hypothesis is a U-shaped relationship between the NPLs securitizations and the systemic risk. We find that the maximum amount of NPLs securitization performed by EU banks to minimize the contribution to systemic risk shifts about Global systemic important banks (G-SIB) designation and country risk. The bank’s contribution to systemic risk lies in the involvement of the bank in this instrument and not in its features. Our results contribute to the ongoing debate on the important issue of designing suitable systemic risk indicators that act as Early Warning Systems (EWS) for predicting incoming financial crises. Evaluating the bank's contribution to systemic risk is important to take into account the bank’s exposure to NPL securitization.

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Credit risk transfer and financial sector stability

Cited by 99 publications

References 17 publications

Credit Risk Hedging, Deposit Insurance Fund Protection, and Default Risk in Retail Banking during a Financial Crisis

Credit Risk Hedging, Deposit Insurance Fund Protection, and Default Risk in Retail Banking during a Financial Crisis

Securitization and CDS in U.S. bank lending

How Does NPLs Securitization Affect EU Banks’ Systemic Risk?

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