Tying loan interest rates to borrowers' CDS spreads

Ivan T. Ivanov, Joao Santos and Thu Vo

No 2014-70, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.

Keywords: Market-based pricing; loan spreads; loan covenants; CDS spreads (search for similar items in EconPapers)
JEL-codes: G10 G21 G30 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2014-06-11
New Economics Papers: this item is included in nep-ban
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