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CDS pricing and accounting disclosures: Evidence from U.S. bank holding corporations around the recent financial crisis

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  • Kanagaretnam, Kiridaran
  • Zhang, Gaiyan
  • Zhang, Sanjian Bill

Abstract

We investigate what accounting information is important for explaining the credit risk for U.S. bank holding corporations (BHCs) during the recent crisis and find that several CAMELS variables are significantly associated with credit default swap (CDS) spreads. Consistent with industry experience, BHCs with more real estate loans do have higher credit risk as measured by CDS spread. With the newly available finer disclosures for the securities account, we find a positive association between risky assets-backed securities (ABS) and CDS spreads. Our results confirm real estate risk as a major risk for U.S. BHCs during the recent financial crisis. Moreover, our study highlights the importance of distinguishing loans/securities investments by type in understanding the relationship between accounting information and bank credit risk. In addition, we do not find significant association between several accounting-based risk measures and the CDS spread, a forward-looking market-based risk measure.

Suggested Citation

  • Kanagaretnam, Kiridaran & Zhang, Gaiyan & Zhang, Sanjian Bill, 2016. "CDS pricing and accounting disclosures: Evidence from U.S. bank holding corporations around the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 22(C), pages 33-44.
    • Handle: RePEc:eee:finsta:v:22:y:2016:i:c:p:33-44
    DOI: 10.1016/j.jfs.2015.11.001
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    4. Benbouzid, Nadia & Mallick, Sushanta K. & Sousa, Ricardo M., 2017. "An international forensic perspective of the determinants of bank CDS spreads," Journal of Financial Stability, Elsevier, vol. 33(C), pages 60-70.
    5. Kanitsorn Terdpaopong & Robert C. Rickards & Penprapak Manapreechadeelert, 2020. "The 2011 floods’ impact on the Thai industrial estates’ financial stability: a ratio analysis with policy recommendations," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(3), pages 1991-2014, March.
    6. Bandyopadhyay, Satiprasad & Jha, Ranjini & Kennedy, Duane, 2017. "The effect of the US subprime crisis on Canadian banks," Advances in accounting, Elsevier, vol. 36(C), pages 58-74.
    7. Pereira, John & Sorwar, Ghulam & Nurullah, Mohamed, 2018. "What drives corporate CDS spreads? A comparison across US, UK and EU firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 188-200.

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    More about this item

    Keywords

    Credit default swaps; CAMELS; Credit crisis; Risk pricing; Accounting disclosures;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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