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CDS and Credit: The Effect of the Bangs on Credit Insurance, Lending and Hedging

Author

Listed:
  • Yalin Gündüz

    (Deutsche Bundesbank)

  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • Gunseli Tumer-Alkan

    (VU University Amsterdam; Vrije Universiteit Amsterdam, School of Business and Economics)

  • Yuejuan Yu

    (Shandong University)

Abstract

We assess the differential impact of the “Big Bang” and “Small Bang” contract and convention changes on market participants across CDS markets. We couple comprehensive bank-firm level CDS trading data from DTCC to the German credit register containing bilateral bank-firm credit exposures. We find that after the Bangs, the cost of buying CDS contracts becomes lower for non-dealer banks, and that – because of this decrease in insurance cost – these banks extend relatively more credit to CDS traded and affected firms compared to dealers, and hedge more effectively. Hence, standardization lowers the cost of credit insurance and increases credit availability.

Suggested Citation

  • Yalin Gündüz & Steven Ongena & Gunseli Tumer-Alkan & Yuejuan Yu, 2024. "CDS and Credit: The Effect of the Bangs on Credit Insurance, Lending and Hedging," Swiss Finance Institute Research Paper Series 24-83, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2483
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    More about this item

    Keywords

    Credit default swaps; credit exposure; hedging; bank lending; Depository Trust and Clear-ing Corporation (DTCC);
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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