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

Beyhaghi, Mehdi; Massoud, Nadia; Saunders, Anthony

doi:10.1016/j.jcorpfin.2016.12.006

Cited by 20 publications

(12 citation statements)

References 51 publications

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“…In a research, sample was constructed to examine two questions: a bank’s choice as to whether or not to lay off the CR of a specific loan and a bank’s decision of which CR transfer mechanism to use if it chooses to lay off its CR, using data from seven different databases to explain banks’ decision to lay off a loan’s CR, they were able to recommend, that, if a bank is viewed as an extensive seller of its loans it indicates that it is either capital and liquidity constrained and/or making high-risk loans. Thus, the volume of loan sales may be viewed as a signal of bank risk exposure for bank examiners and regulators (Beyhaghi et al , 2014). Cho and Chung (2016) applied regression model and the Fisher’s F -test and found that firms with internal control weaknesses (ICW) tend to have inflated loan loss reserves and provisions, indicating that internal control effectiveness is an important factor of loan loss estimates.…”

Section: Literature Review[2]mentioning

confidence: 99%

Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

St-Hilaire¹,

Boisselier

2018

JEAS

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Purpose The purpose of this paper is to evaluate the need to incorporate the loan loss provisions (LLPs) and risk measures in order to examine the repercussions on advancing approach and profitability. Design/methodology/approach The study investigates the effect of explanatory variables on profitability and advancing approach of the banks. The variables used in this study were determined, based on the review of relevant literature and established according to the availability of data for measurement purposes. Inspired by previous research, Hausman test is used in this study to determine whether a random or fixed effects generalized least squares model is best. The linear regression model is applied to strongly balanced panel data obtained from the ten commercial banks. Findings The findings demonstrate that Nigerian banking sector considers LLPs in terms of its decision making of advancing approach, while proper inclusion of credit, market and operational risk is more important for South Africa’s banks rather than the maintenance of provisions. Originality/value Moreover, the credit risk proves to be more needed factor of consideration for Nigerian rather for South African banks. This is an answer to the strong economy of South Africa as compared to Nigeria and more chances of default faced by Nigerian banks.

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Section: Literature Review[2]mentioning

confidence: 99%

Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

St-Hilaire¹,

Boisselier

2018

JEAS

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“…Using the results of previous studies, we can make several predictions regarding the impact of CRDs on a BHC's loan yield. First, buying or selling CRDs as protection against credit risk reduces capital requirements, increases liquidity, and decreases the volatility of the ROA (Sinkey & Carter, 2000;Ashraf et al, 2007;Bedendo & Bruno, 2012;Beyhaghi et al, 2017). These changes reduce the costs of the BHC.…”

Section: The Impact Of Crd Activities On the Loan Yieldmentioning

confidence: 99%

“…Banks are more likely to hedge commercial and industrial (C&I) loans and conduct transactional hedges on large loans (Hirtle, 2009;Minton et al, 2009). Hedging with CRDs is preferable over asset sales when credit is safe and does not require significant monitoring (Beyhaghi et al, 2017). Loans to customers with whom the lender has ongoing relationships are more likely to be hedged with CRDs (Beyhaghi et al, 2017).…”

Section: The Impact Of Crd Activities On the Relation Between The Loan Yield And Loan Typesmentioning

confidence: 99%

“…CRDs and asset sales may be used separately or jointly for risk transfer, but there are exceptions. Banks favor asset sales when loans are risky (Parlour & Winton, 2013) but they favor CRDs when there is an ongoing relationship between the lender and the borrower (Beyhaghi et al, 2017). Banks also prefer CRDs in competitive markets when information about the target loans is publicly available (Hakenes & Schnabel, 2010).…”

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Credit derivatives and loan yields

Azam¹,

Mamun

Tannous

2021

The Financial Review

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We compare the loan yields of credit derivative (CRD) active bank holding companies (BHCs) with the loan yields of CRD inactive peers over the pre-crisis, crisis (2008-10), and postcrisis periods. During the post-crisis period, protection purchasers report lower yields than their peers, while sellers report yields like those reported by their peers. The relation between the yield and commercial and industrial (C&I) loans is positive and significant during the pre-and post-crisis periods, and CRD activities do not affect this relation. CRD activities are changing the relations between the loan yield and consumer loans, real estate loans, and securitization.

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“…3. Beyhaghi et al (2017) describe banks choosing between credit derivatives and secondary loan sales to manage credit risk. Much of the literature on financial networks deals with the case when links represent loans from one financial institution to another rather than corporate or regulatory relationships.…”

Section: Conclusion and Extensionsmentioning

confidence: 99%

Efficiency, stability, and government regulation of risk-sharing financial networks

Chou¹,

Ehrlich

Sverdlove

2019

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Purpose By applying models of social and economic networks to financial institutions, the purpose of this paper is to address the issues of how policy makers can promote financial network stability and social efficiency. Design/methodology/approach The authors characterize the decentralized network formation of financial institutions in three stages through which institutions choose to become member banks connected to a central bank, bank-holding company subsidiaries or non-banks. Financial institutions choose one of the three roles in an endogenous process by considering the effects of sharing shocks among the members of the network. In the model, there is a social-welfare-maximizing government regulator at the center of the network. Findings The authors show that the stable equilibrium network is not always the efficient network, so the central authority must use policy instruments to ensure that the stable equilibrium network is as close as possible to the efficient network. Research limitations/implications To obtain the theoretical results, the authors make assumptions about the utility function and risk aversion of a financial institution, as well as about the costs of network formation. These assumptions might need to be relaxed to bring the model closer to real-world institutions. Practical implications The results suggest that regulators must try to set their policy variables to make the efficient network as close as possible to the stable network. Originality/value The contribution is to incorporate concepts from social network theory into the modeling of financial networks. The results may be of use to regulators in maintaining the stability of the financial system.

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

Cited by 20 publications

References 51 publications

Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

Evaluating profitability strategies and the determinants of the risk performance of sectoral and banking institutions

Credit derivatives and loan yields

Efficiency, stability, and government regulation of risk-sharing financial networks

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