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Credit default swaps and regulatory capital relief: Evidence from European banks

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  • Thornton, John
  • Tommaso, Caterina di

Abstract

In a sample of European banks, we find that credit default swaps (CDS) are used for regulatory arbitrage to lower capital requirements and facilitate greater risk taking. Moreover, CDS-using banks generate higher returns on capital from the lower risk weighted assets they hold relative to banks that do not use CDS.

Suggested Citation

  • Thornton, John & Tommaso, Caterina di, 2018. "Credit default swaps and regulatory capital relief: Evidence from European banks," Finance Research Letters, Elsevier, vol. 26(C), pages 255-260.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:255-260
    DOI: 10.1016/j.frl.2018.02.008
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    References listed on IDEAS

    as
    1. William R. Cline, 2017. "The Right Balance for Banks: Theory and Evidence on Optimal Capital Requirements," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 7212, October.
    2. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
    3. Pennacchi, George G, 1988. " Loan Sales and the Cost of Bank Capital," Journal of Finance, American Finance Association, vol. 43(2), pages 375-396, June.
    4. Jill Cetina, 2015. "More Transparency Needed For Bank Capital Relief Trades," Briefs 15-04, Office of Financial Research, US Department of the Treasury.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Caterina Di Tommaso, 2022. "Securitization and CDS in U.S. bank lending," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1120-1133, January.
    2. Fiedor, Paweł & Killeen, Neill, 2021. "Securitisation special purpose entities, bank sponsors and derivatives," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    3. González-Fernández, Marcos & González-Velasco, Carmen, 2020. "An alternative approach to predicting bank credit risk in Europe with Google data," Finance Research Letters, Elsevier, vol. 35(C).

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    More about this item

    Keywords

    Credit default swaps; Regulatory arbitrage; European banks;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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