The influence of systemic importance indicators on banks’ credit default swap spreads

Jill Cetina and Bert Loudis

Journal of Risk Management in Financial Institutions, 2016, vol. 9, issue 1, 17-31

Abstract: This paper examines the relationship between banks’ observed credit default swap (CDS) spreads and possible measures of systemic importance. The authors use five-year CDS spreads from Markit with an international sample of 71 banks to investigate whether market participants are giving them a discount on borrowing costs based on the expectation that governments would consider them ‘too big to fail’. They find a consistent, statistically significant negative relationship between five-year CDS spreads and nine different systemic importance indicators using a generalised least squares (GLS) model. The paper finds that banks perceived as too big to fail have CDS spreads 44–80 basis points lower than other banks, depending on the asset-size threshold and controls used. Additionally, the study suggests that market participants pay more attention to asset size than to a more complex measure, such as designation as a globally systemically important bank (G-SIB), that includes additional factors, such as substitutability and interconnectedness. Lastly, the model suggests that asset size acts as a threshold effect, rather than a continuous effect with the best fitting models using asset-size thresholds of US$50bn–150bn.

Keywords: banking; too big to fail; size effect; heightened prudential regulation; CDS spreads; systemic importance (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2016:v:9:i:1:p:17-31

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