Why and how do banks lay off credit risk? The choice between retention, loan sales and credit default swaps

Mehdi Beyhaghi, Nadia Massoud and Anthony Saunders

Journal of Corporate Finance, 2017, vol. 42, issue C, 335-355

Abstract: We find that banks with capital and liquidity constraints are more likely to use credit risk transfer (CRT) instruments, including the credit derivative and the secondary loan markets. Relationship lenders and lead syndicate lenders are more likely to hold loans on their balance-sheets regardless of borrowers' riskiness. Finally, we find a separating equilibrium in the CRT market: loans to ex-ante riskier borrowers are more likely to be sold and loans to safer borrowers are more likely to be hedged with CDS. We view credit derivatives and loan sales as joint choice variables in determining the hedging instrument to use.

Keywords: Credit risk transfer; Loan sales; Credit default swaps; Financial and regulatory constraints (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:42:y:2017:i:c:p:335-355

DOI: 10.1016/j.jcorpfin.2016.12.006

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