This paper examines the use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2003 only 19 large banks out of 345 use credit derivatives. Though few banks use credit derivatives, the assets of these banks represent on average two thirds of the assets of bank holding companies with assets in excess of $1 billion. Few banks are net buyers of credit protection and disclose using credit derivatives to hedge loans. Banks are more likely to be net protection buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios. The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a bank's loan portfolio and negatively or not related to other types of bank loans. The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks.
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11579.
Length: Date of creation: Aug 2005 Date of revision: Handle: RePEc:nbr:nberwo:11579
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Find related papers by JEL classification: G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) G20 - Financial Economics - - Financial Institutions and Services - - - General G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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Geczy, Christopher & Minton, Bernadette A & Schrand, Catherine, 1997.
" Why Firms Use Currency Derivatives,"
Journal of Finance,
American Finance Association, vol. 52(4), pages 1323-54, September.
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Douglas W. Diamond & Raghuram G. Rajan, 2000.
"A Theory of Bank Capital,"
Journal of Finance,
American Finance Association, vol. 55(6), pages 2431-2465, December.
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Douglas W. Diamond & Raghuram G. Rajan, .
"A Theory of Bank Capital,"
CRSP working papers
363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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