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:10.2139/ssrn.2645119

Cited by 5 publications

(6 citation statements)

References 41 publications

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“…No-CDS firms' idiosyncratic and total risks are greater than those of CDS firms. This is consistent with the findings ofBeyhaghi, Massoud, and Saunders (2017) who find that banks are more likely to hedge safer borrowers' loans with CDS and to sell riskier borrowers' loans. On the other hand, CDS firms have higher market risk.…”

supporting

confidence: 91%

“…Saretto and Tookes (2013) find CDS trading enables firms to hold more debt for longer time periods. This may be because banks are more likely to hedge safer borrowers' loans with CDS (Beyhaghi, Massoud, and Saunders, 2017). Subrahmanyam, Tang, and Wang (2016) argue the higher levels of debt resulting from CDS trading prompts some firms to increase their cash holdings.…”

Section: Introductionmentioning

confidence: 99%

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Credit default swaps and firms' financing policies

Fuller

Yildiz

Uymaz

2018

Journal of Corporate Finance

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This paper examines the impact of credit default swaps (CDS) on firms' financing and trade credit policies. Our results indicate firms with CDS trading on their debt increase their equity issuances. Further, firms with CDS trading on their debt and high levels of long-term debt issuances decrease their debt financing. Total and idiosyncratic risks are also higher for firms with CDS trading on their debt. These firms pay their suppliers and collect from their customers quicker. Thus, the impacts of the CDS market are not limited to the borrowing firms but also affect economically connected firms.

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supporting

confidence: 91%

Section: Introductionmentioning

confidence: 99%

Credit default swaps and firms' financing policies

Fuller

Yildiz

Uymaz

2018

Journal of Corporate Finance

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“…Further, the authors find an increase in a bank's CDS position leads to a relatively higher credit exposure to safer firms after the CDS Small Bang. Beyhaghi, Massoud, and Saunders (2016) investigate the propensity of banks to use credit risk transfer instruments, such as CDS. They find that banks are more likely to use credit risk transfer instruments (e.g., CDS) the more capital or liquidity constrained they are.…”

Section: Empirical Evidencementioning

confidence: 99%

Identifying Empty Creditors with a Shock and Micro-Data

et al. 2020

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Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors" as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany, that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for firms with CDS traded on them drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Further, we find that firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained, and that are liquidity constrained recognise the empty creditor effect to a larger extent. Furthermore, banks' business models affect the degree to which they recognise the empty creditor effect. Where banks that monitor their creditors less and that earn a smaller portion of their income from interest activities, recognise the empty creditor effect to a larger extent.

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“…Thus, the volume of loan sales may be viewed as a signal of bank risk exposure for bank examiners and regulators (Beyhaghi, Massoud, & Saunders, ). Cho & Chung () 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 Reviewmentioning

confidence: 99%

The strategic configurations as a contingency factor in the success of operational risk measures

St-Hilaire

2018

Strategic Change

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The loan loss provisions and risk measures may be needed to examine the repercussions on the advancing approach profitability. The more loan loss provision, capital adequacy ratio, and risks measures are accurate, the more banks can enhance their profitability and cater the need of their target audience. Loan loss provisions are increasing in the tax rate for countries that permit general provision tax deductibility. They have a negative relationship with profitability of financial institution.

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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 5 publications

References 41 publications

Credit default swaps and firms' financing policies

Credit default swaps and firms' financing policies

Identifying Empty Creditors with a Shock and Micro-Data

The strategic configurations as a contingency factor in the success of operational risk measures

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