Finance and Economics Discussion Series: Credit Derivatives in Banking: Useful Tools for Managing Risk (Paperback) (ISBN-13: 9781288722013)

We model the effects on banks of the introduction of a market for credit derivatives--in particular, credit default swaps. A bank can use such swaps to temporarily transfer credit risks of their loans to others, reducing the likelihood that defaulting loans would trigger the bank's financial distress. Because credit derivatives are more flexible at transferring risks than are other, more established tools, such as loan sales without recourse, these instruments make it easier for banks to circumvent the lemons'' problem caused by banks' superior information about the credit quality of their loans. However, we find that the introduction of a credit derivatives market is not necessarily desirable because it can cause other markets for loan risk-sharing to break down. In this case, the existence of a credit derivatives market will lead to a greater risk of bank insolvency.

Author: United States Federal Reserve Board,Gregory R. Duffee,Chunsheng Zhou
ISBN-10: 128872201X
ISBN-13: 9781288722013
Publisher: Bibliogov
Language: English
Published: 02/06/2013
Pages: 34
Format: Paperback
Weight: 0.18lbs
Size: 9.69h x 7.44w x 0.07d