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The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns

  • Marsh , Ian W

    ()

    (Cass Business School, London, and Bank of Finland)

Although innovative credit risk transfer techniques help to allocate risk more optimally, policymakers worry that they may detrimentally affect the effort spent by financial intermediaries in screening and mo-nitoring credit exposures. This paper examines the equity market’s response to loan announcements. In common with the literature it reports a significantly positive average excess return – the well known ‘bank certification’ effect. However, if the lending bank is known to actively manage its credit risk ex-posure through large-scale securitization programmes, the magnitude of the effect falls by two thirds. The equity market does not appear to place any value on news of loans extended by banks that are known to transfer credit risk off their books.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0631netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 31/2006.

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Length: 33 pages
Date of creation: 12 Dec 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_031
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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  1. 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.
  2. Chiesa, Gabriella, 2008. "Optimal credit risk transfer, monitored finance, and banks," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 464-477, October.
  3. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  4. Christopher James & David C. Smith, 2000. "Are Banks Still Special? New Evidence on Their Role in the Corporate Capital-Raising Process," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 52-63.
  5. Alan Morrison, 2000. "Credit Derivatives, Disintermediation and Investment Decisions," OFRC Working Papers Series 2001fe01, Oxford Financial Research Centre.
  6. 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.
  7. Cebenoyan, A. Sinan & Strahan, Philip E., 2004. "Risk management, capital structure and lending at banks," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 19-43, January.
  8. 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.
  9. Dahiya, Sandeep & Puri, Manju & Saunders, Anthony, 2001. "Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans," Research Papers 1746, Stanford University, Graduate School of Business.
  10. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
  11. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
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