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Bank private information in CDS markets

Author

Listed:
  • Bilan, Andrada
  • Ongena, Steven
  • Pancaro, Cosimo

Abstract

Can banks trade credit default swaps (CDSs) referenced on their current corporate clients at competitive prices, or are banks penalized for potentially holding private information? To answer this question we merge CDS trades reported under the European Market Infrastructure Regulation (EMIR) with syndicated loans from DealScan, and compare the prices on similar CDSs that the same dealer offers to banks and to other investors. We find that banks lending to a corporation purchase CDSs on this corporation at lower prices, and that, after trading with banks, dealers can earn higher margins on these CDSs when trading with other investors. Our findings suggest that banks hold valuable private information which is shared in their trades with dealers. Dealers then disseminate this information to financial markets. JEL Classification: G14, G21, G23

Suggested Citation

  • Bilan, Andrada & Ongena, Steven & Pancaro, Cosimo, 2023. "Bank private information in CDS markets," Working Paper Series 2818, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232818
    Note: 1934813
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2818~89a1dc4b51.en.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banks; credit derivatives; EMIR; price discovery; syndicated loans;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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