Credit derivatives, capital requirements and opaque OTC markets
Antonio Nicolo' () and
Loriana Pelizzon ()
Journal of Financial Intermediation, 2008, vol. 17, issue 4, 444-463
In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signaling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signaling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets.
Keywords: Credit; derivatives; Signaling; contracts; Capital; requirements (search for similar items in EconPapers)
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Working Paper: Credit Derivatives, Capital Requirements and Opaque OTC Markets (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:17:y:2008:i:4:p:444-463
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