Laying off credit risk: Loan sales versus credit default swaps

Parlour, Christine A.; Winton, Andrew

doi:10.1016/j.jfineco.2012.08.004

Cited by 178 publications

(90 citation statements)

References 45 publications

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“…As shown theoretically by Parlour and Winton (2013), moral hazard problems arising from CDS trading are less severe if lender reputation is high. Therefore, the e ect of CDS trading on syndication should be particularly strong for less reputable firms if moral hazard is a significant concern.…”

Section: Bank Reputationmentioning

confidence: 94%

“…As potential participants are aware of this problem, they are only willing to invest if the lead arranger retains a large enough fraction of the loan to credibly commit to monitor the borrower. As shown by Parlour and Winton (2013), retaining a larger share of the loan is no longer a credible signal by the bank if CDS are available. The lead arranger can lay o credit risk anonymously via CDS, which e ectively reduces the incentive to monitor.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

“…Parlour and Winton (2013) show theoretically that moral hazard problems arising from CDS trading are less severe if the lender's reputation is high. Our results, however, indicate that the e ect of CDS trading on the decision to syndicate a loan is increasing in lead arranger reputation.…”

Section: Introductionmentioning

confidence: 96%

“…Loan sales and CDS di er in one key aspect: loan sales transfer both credit risk and control rights to the counterparty, while CDS only transfer the credit risk. Hence, CDS trading could have a detrimental e ect on bank monitoring incentives because although the credit risk is transferred to the counterparty, the control rights remain with the bank (Parlour and Winton (2013)). If the lead arranger in a syndicated loan can lay o credit risk anonymously via CDS, potential participants may be less willing to invest, as they might fear that the lead bank will no longer monitor the borrower.…”

Section: Introductionmentioning

confidence: 99%

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The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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We analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.Keywords: Loan Sales, Credit Default Swaps, Syndicate Structure, Syndicated Loans JEL-Classification: G21, G32ú Daniel Streitz is from the Institute of Corporate Finance at Humboldt University Berlin. The author would like to thank Tim Adam, Tobias Berg, Valentin Burg, Sudipto Dasgupta, Hermann Elendner, Xavier Giroud, Laurenz Klipper, Augustin Landier, Christian Laux, Gustavo Manso, Martin Oehmke, Steven Ongena (the editor), Gordon Phillips, Tobias Scheinert, Sascha Ste en, Alex Stomper, Gunter Strobl, and an anonymous referee for helpful comments and suggestions. Some of the work on this paper was completed while the author was visiting USC Marshall School of Business. The author gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft through SFB 649 "Economic Risk" and SFB-TR15 "Governance and the E ciency of Economic Systems". Send correspondence to Daniel Streitz, Institute of Corporate Finance, Dorotheenstrasse 1, 10099 Berlin, Germany; E-mail: daniel.streitz@wiwi.hu-berlin.de. The Impact of Credit Default Swap Trading on Loan Syndicationú February 2, 2015 AbstractWe analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.

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Section: Bank Reputationmentioning

confidence: 94%

Section: Theoretical Frameworkmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 96%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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“…A handful of seminal papers provide different and even conflicting explanations/predictions for these two questions. On one hand, Duffee and Zhou (2001); and Parlour and Winton (2008) state that the quality of the loans, the costs of monitoring, and the status of the borrower are the main factors influencing banks" decision to lay off credit risk. On the other hand, Pennacchi (1988); Allen and Carletti (2006);and Thomson (2008) believe that binding financial and regulatory restrictions of the banks, specifically regulatory capital ratio or liquidity, might induce banks to use CRT.…”

Section: Introductionmentioning

confidence: 99%