Half-full or half-empty? Financial institutions, CDS use, and corporate credit risk
Matthew Darst () and
Journal of Financial Intermediation, 2019, vol. 40, issue C
We construct a novel dataset that matches bank holding company credit default swap (CDS) positions to detailed U.S. credit registry data containing both loan and corporate bond holdings by large U.S. banks. The dataset sheds new light on how banks use CDS, and what effects, if any, CDS use has on corporate credit risk. We show that few banks insure loans, even loans of distressed borrowers, suggesting that empty creditor problems among banks are not widespread. We find that banks are more likely to sell than buy CDS when they have a lending relationship with CDS firms. We then create new aggregate measures of hedging activity based on position-level data to test the empty creditor hypothesis. Contrary to existing studies, aggregate measures of credit risk hedging that do not condition on lending relationships overstate bank hedging activity. Furthermore, our regression results do not find any evidence that firm credit risk is adversely impacted when banks in particular purchase CDS.
Keywords: Risk management; Bank lending; Credit risk; Credit default swaps (search for similar items in EconPapers)
JEL-codes: G2 G21 G23 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Half-full or Half-empty? Financial Institutions, CDS Use, and Corporate Credit Risk (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:40:y:2019:i:c:s1042957319300142
Access Statistics for this article
Journal of Financial Intermediation is currently edited by Elu von Thadden
More articles in Journal of Financial Intermediation from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().