Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time
A main cause of the crisis of 2007-2009 is the various ways through which banks have transferred credit risk in the financial system. We study the systematic risk of banks before the crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing Collateralized Loan Obligations (CLOs). After their first usage of either risk transfer method, the share price beta of these banks increases significantly. This suggests the market anticipated the risks arising from these methods, long before the crisis. We additionally separate this beta effect into a volatility and a market correlation component. Quite strikingly, this decomposition shows that the increase in the beta is solely due to an increase in banks' correlations. Thus, while banks may have shed their individual credit risk, they actually posed greater systemic risk. This creates a challenge for financial regulation, which has typically focused on individual institutions.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Instefjord, Norvald, 2005. "Risk and hedging: Do credit derivatives increase bank risk?," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 333-345, February.
- Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
- Wagner, Wolf, 2008. "The homogenization of the financial system and financial crises," Journal of Financial Intermediation, Elsevier, vol. 17(3), pages 330-356, July.
- Wolf Wagner, 2009. "Efficient Asset Allocations in the Banking Sector and Financial Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 5(1), pages 75-95, March.
- Goderis, Benedikt & Marsh, Ian & Vall Castello , Judit & Wagner, Wolf, 2007.
"Bank behaviour with access to credit risk transfer markets,"
Research Discussion Papers
4/2007, Bank of Finland.
- Goderis, B.V.G. & Marsh, I. & Vall Castello, J. & Wagner, W.B., 2006. "Bank Behavior with Access to Credit Risk Transfer Markets," Discussion Paper 2006-100, Tilburg University, Center for Economic Research.
- Hirtle, Beverly, 2009.
"Credit derivatives and bank credit supply,"
Journal of Financial Intermediation,
Elsevier, vol. 18(2), pages 125-150, April.
- Uhde, André & Michalak, Tobias C., 2010. "Securitization and systematic risk in European banking: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3061-3077, December.
- Gunter Franke & Jan Pieter Krahnen, 2007.
"Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations,"
in: The Risks of Financial Institutions, pages 603-634
National Bureau of Economic Research, Inc.
- Günter Franke & Jan Pieter Krahnen, 2005. "Default risk sharing between banks and markets: the contribution of collateralized debt obligations," CoFE Discussion Paper 05-04, Center of Finance and Econometrics, University of Konstanz.
- Franke, Günter & Krahnen, Jan Pieter, 2005. "Default risk sharing between banks and markets: The contribution of collateralized debt obligations," CFS Working Paper Series 2005/06, Center for Financial Studies (CFS).
- Guenter Franke & Jan Pieter Krahnen, 2005. "Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Working Papers 11741, National Bureau of Economic Research, Inc.
- Cardone-Riportella, Clara & Samaniego-Medina, Reyes & Trujillo-Ponce, Antonio, 2010. "What drives bank securitisation? The Spanish experience," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2639-2651, November.
- Alan Morrison, 2000. "Credit Derivatives, Disintermediation and Investment Decisions," OFRC Working Papers Series 2001fe01, Oxford Financial Research Centre.
- Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005.
"Using Market Information for Banking System Risk Assessment,"
817, University Library of Munich, Germany.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Using Market Information for Banking System Risk Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
- Calmès, Christian & Théoret, Raymond, 2010.
"The impact of off-balance-sheet activities on banks returns: An application of the ARCH-M to Canadian data,"
Journal of Banking & Finance,
Elsevier, vol. 34(7), pages 1719-1728, July.
- Christian Calmès & Raymond Théoret, 2009. "The Impact of Off-Balance-Sheet Activities on Banks Returns: An Application of the ARCH-M to Canadian Data," RePAd Working Paper Series UQO-DSA-wp032009, Département des sciences administratives, UQO.
- Minton, Bernadette A. & Stulz, Rene M. & Williamson, Rohan, 2005.
"How Much Do Banks Use Credit Derivatives to Reduce Risk?,"
Working Paper Series
2005-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Bernadette A. Minton & René Stulz & Rohan Williamson, 2005. "How Much Do Banks Use Credit Derivatives to Reduce Risk?," NBER Working Papers 11579, National Bureau of Economic Research, Inc.
- Foos, Daniel & Norden, Lars & Weber, Martin, 2010. "Loan growth and riskiness of banks," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2929-2940, December.
- Larry E. Jones & Rodolfo E. Manuelli, 2001.
"Endogenous Policy Choice: The Case of Pollution and Growth,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 369-405, July.
- Larry E. Jones & Rodolfo E. Manuelli, 2000. "Endogenous policy choice: the case of pollution and growth," Staff Report 276, Federal Reserve Bank of Minneapolis.
- Beverly Hirtle, 2008. "Credit derivatives and bank credit supply," Staff Reports 276, Federal Reserve Bank of New York.
- Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
- Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 121-139, January.
- Marsh , Ian W, 2006. "The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns," Research Discussion Papers 31/2006, Bank of Finland.
- Alan D. Morrison, 2005. "Credit Derivatives, Disintermediation, and Investment Decisions," The Journal of Business, University of Chicago Press, vol. 78(2), pages 621-648, March.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:35:y:2011:i:6:p:1391-1398. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.