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Credit derivatives and bank credit supply

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Abstract

Credit derivatives are the latest in a series of innovations that have had a significant impact on credit markets. Using a micro data set of individual corporate loans, this paper explores whether use of credit derivatives is associated with an increase in bank credit supply. The author finds evidence that greater use of credit derivatives is associated with greater supply of bank credit for large term loans--newly negotiated loan extensions to large corporate borrowers--though not for (previously negotiated) commitment lending. This finding suggests that the benefits of the growth of credit derivatives may be narrow, accruing mainly to large firms that are likely to be ?named credits? in these transactions. Further, the impact is primarily on the terms of lending--longer loan maturity and lower spreads--rather than on loan volume. Finally, use of credit derivatives appears to be complementary to other forms of hedging by banks.

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  • Beverly Hirtle, 2008. "Credit derivatives and bank credit supply," Staff Reports 276, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:276
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    More about this item

    Keywords

    Credit derivatives; Credit; Bank loans; Commercial loans;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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