Credit Derivatives, Disintermediation and Investment Decisions

Alan Morrison

No 2001-FE-01, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that when entrepreneurs rely upon the certification value of bank debts to obtain cheap bond market insurance, the existance of a credit derivatives market may cause them to issue sub-investment grade bonds instead, and to engage in second-best behaviour. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivatives.

Keywords: Credit derivative; monitoring; junk bonds; debt finance; capital structure (search for similar items in EconPapers)
JEL-codes: G24 G28 G34 (search for similar items in EconPapers)
Date: 2001-05-01
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Citations: View citations in EconPapers (5)

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