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Firm credit risk in normal times and during the crisis: are banks less risky?

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  • Burkhard Raunig

Abstract

Bank solvency was a major issue during the financial crisis of 2007-2009, but bank credit default swap (CDS) spreads were almost always below nonbank CDS spreads. What is the reason for this gap? Are banks perceived to be less risky? This study empirically decomposes CDS premia for 45 major banks and 167 large industrial firms from Europe and the US. It turns out that expected losses are usually somewhat lower for banks than for nonbanks, but expected losses contribute relatively little to the observed CDS premia. CDS spreads for banks and nonbanks differ mainly because market participants require a lower compensation for bearing bank credit risk. The quite persistent difference in the credit risk premia for banks and nonbanks disappears only temporarily during the crisis.

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  • Burkhard Raunig, 2015. "Firm credit risk in normal times and during the crisis: are banks less risky?," Applied Economics, Taylor & Francis Journals, vol. 47(24), pages 2455-2469, May.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:24:p:2455-2469
    DOI: 10.1080/00036846.2015.1008758
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    Cited by:

    1. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Kumar, Ronald Ravinesh & Mensi, Walid, 2017. "Interdependence and contagion among industry-level US credit markets: An application of wavelet and VMD based copula approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 310-324.
    2. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Ferrer, Roman & Hammoudeh, Shawkat, 2017. "Asymmetric determinants of CDS spreads: U.S. industry-level evidence through the NARDL approach," Economic Modelling, Elsevier, vol. 60(C), pages 211-230.
    3. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Hammoudeh, Shawkat & Shahbaz, Muhammad, 2017. "Directional and bidirectional causality between U.S. industry credit and stock markets and their determinants," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 46-61.
    4. Asia Aman, 2019. "Are CDS Spreads Sensitive to the Term Structure of the Yield Curve? A Sector-Wise Analysis under Various Market Conditions," JRFM, MDPI, vol. 12(4), pages 1-13, September.
    5. Guesmi, Khaled & Dhaoui, Abderrazak & Goutte, Stéphane & Abid, Ilyes, 2018. "On the determinants of industry-CDS index spreads: Evidence from a nonlinear setting," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 233-254.
    6. Syed Jawad Hussain Shahzad & Safwan Mohd Nor & Nur Azura Sanusi & Ronald Ravinesh Kumar, 2018. "The Determinants of Credit Risk: Analysis of US Industry-level Indices," Global Business Review, International Management Institute, vol. 19(5), pages 1152-1165, October.

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