Market discipline and too-big-to-fail in the CDS market: Does banks' size reduce market discipline?
AbstractThis paper examines market discipline in the credit default swap (CDS) market and the potential distortion of CDS spreads which arises when a bank is thought to be too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted by a size effect when a bank is considered to be too-big-to-fail. A 1 percentage point increase in size reduces the CDS spread of a bank by about 2 basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases, the existence of banks that are considered to be too-big-to-rescue raises important new issues for banking supervisors.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 18 (2011)
Issue (Month): 2 (March)
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Web page: http://www.elsevier.com/locate/jempfin
Market discipline Too-big-to-fail Too-big-to-rescue CDS spreads;
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- Bosma, Jakob & Koetter, Michael & Wedow, Michael, 2012. "Credit risk connectivity in the financial industry and stabilization effects of government bailouts," Discussion Papers 16/2012, Deutsche Bundesbank, Research Centre.
- Radev, Deyan, 2013. "Systemic risk and sovereign debt in the Euro area," SAFE Working Paper Series 37, Center of Excellence SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
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