Risk management, capital structure and lending at banks

How Much Do Banks Use Credit Derivatives to Hedge Loans?

“…For example, the median tier-1 risk-adjusted capital ratio for net buyers of credit risk protection is 8.56% compared with 10.92% for all other banks. This result is consistent with Cebenoyan and Strahan (2004) who find that banks that sell loans have less capital. There is also no difference in non-performing loans.…”

The Effect of Credit Derivatives on Financial Stability

“…Risk exposures become more attractive, knowing that they can be offloaded through a more active derivatives trading policy. These views are consistent with the empirical work of Cebenoyan and Strahan (2004), who provide evidence that banks who manage their risks in a loan sale market hold a larger share of their portfolio in risky assets than banks inactive in loan sale.…”

Securitization and Bank Performance

“…But Jones () argues that “regulatory capital arbitrage” is not the only incentive to engage in securitization and suggests that banks will also securitize to benefit from increased economies of scale, to reduce the costs of debt financing, and to diversify funding sources. Minton, Sanders, and Strahan () and Calomiris and Mason () provide empirical tests of the regulatory arbitrage hypothesis against the efficient contracting hypothesis, which suggests that securitization lowers the cost of debt finance. The evidence from both studies supports the efficient contracting view.…”