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The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns

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Author Info
Marsh , Ian W () (Cass Business School, London, and Bank of Finland)
Abstract

Although innovative credit risk transfer techniques help to allocate risk more optimally, policymakers worry that they may detrimentally affect the effort spent by financial intermediaries in screening and mo-nitoring credit exposures. This paper examines the equity market’s response to loan announcements. In common with the literature it reports a significantly positive average excess return – the well known ‘bank certification’ effect. However, if the lending bank is known to actively manage its credit risk ex-posure through large-scale securitization programmes, the magnitude of the effect falls by two thirds. The equity market does not appear to place any value on news of loans extended by banks that are known to transfer credit risk off their books.

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Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 31/2006.

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Length: 33 pages
Date of creation: 12 Dec 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_031

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
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Keywords: bank loans credit derivatives bank certification

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  2. Niinimäki, Juha-Pekka & Takalo, Tuomas & Kultti, Klaus, 2006. "The role of comparing in financial markets with hidden information," Research Discussion Papers 1/2006, Bank of Finland. [Downloadable!]
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  4. Kilponen, Juha & Ripatti , Antti, 2006. "Labour and product market competition in a small open economy, Simulation results using a DGE model of the Finnish economy," Research Discussion Papers 5/2006, Bank of Finland. [Downloadable!]
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  10. Vanhala, Juuso, 2006. "Labour taxation and shock propagation in a New Keynesian model with search frictions," Research Discussion Papers 12/2006, Bank of Finland. [Downloadable!]
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