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Credit derivatives: Banks' behaviour, financial stability and banking regulation

Author

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  • Karras, Konstantinos N.

Abstract

This paper studies the emergence and development of credit derivatives, and how they have significantly changed the area of credit risk management. In studying the behavioural effects of credit derivatives on banks' behaviour, the theoretical analysis incorporates the modelling of optimal bank capital reserves with the use of credit derivatives by employing an inventory management framework. It is shown that credit derivatives can lead banks to reduce their capital buffer stock, which can have multiple effects on banks' behaviour. By considering these effects in parallel with the existing literature, this paper investigates the implications of credit derivatives with respect to financial stability and banking regulation.

Suggested Citation

  • Karras, Konstantinos N., 2009. "Credit derivatives: Banks' behaviour, financial stability and banking regulation," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 2(2), pages 193-213, March.
    • Handle: RePEc:aza:rmfi00:y:2009:v:2:i:2:p:193-213
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    More about this item

    Keywords

    banking firm; credit derivatives; inventory management; financial stability;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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