How much do banks use credit derivatives to reduce risk?
By: Bernadette A. Minton, Ren Štulz, Rohan Williamson.
Contributors: Stulz, René M.; Williamson, Rohan.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11579; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11579.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Credit derivatives -- United States.; Bank loans -- United States.
Description: "This paper examines the use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars.  Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2003 only 19 large banks out of 345 use credit derivatives.  Though few banks use credit derivatives, the assets of these banks represent on average two thirds of the assets of bank holding companies with assets in excess of $1 billion.  Few banks are net buyers of credit protection and disclose using credit derivatives to hedge loans.  Banks are more likely to be net protection buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios.  The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a bank's loan portfolio and negatively or not related to other types of bank loans.  The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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