Credit Derivatives, Disintermediation and Investment Decisions
Alan Morrison ()
OFRC Working Papers Series from Oxford Financial Research Centre
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.
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Persistent link: https://EconPapers.repec.org/RePEc:sbs:wpsefe:2001fe01
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