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Credit Derivatives, Disintermediation, and Investment Decisions

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Author Info
Alan D. Morrison (Said Business School, University of Oxford)
Abstract

The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that, when entrepreneurs rely on the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue sub-investment grade bonds instead and engage in second-best behavior. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivatives.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB780209
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 78 (2005)
Issue (Month): 2 (March)
Pages: 621-648
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:621-648

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  1. Minton, Bernadette & Stulz, Rene & Williamson, Rohan, 2008. "How Much Do Banks Use Credit Derivatives to Hedge Loans?," Working Paper Series 2008-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  2. Hendrik Hakenes & Isabel Schnabel, 2009. "Credit Risk Transfer and Bank Competition," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2009_33, Max Planck Institute for Research on Collective Goods. [Downloadable!]
  3. Beverly Hirtle, 2008. "Credit derivatives and bank credit supply," Staff Reports 276, Federal Reserve Bank of New York. [Downloadable!]
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  4. Norden, L. & Wagner, W.B., 2007. "Credit Derivatives and Loan Pricing," Discussion Paper 2007-015, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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This page was last updated on 2009-12-2.

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