Credit Risk and Interdealer Networks

We study how bank holding companies interact in the corporate bond, syndicated loan, and credit default swap (CDS) markets. These three markets represent different ways to trade credit risk. The corporate bond market allows market participants to trade corporate credit risk directly. Similarly, the syndicated loan market allows direct exposure to corporate credit risk but is limited to only the largest borrowers and has lower secondary market liquidity. Finally, participants in the CDS market take an indirect exposure to the ultimate borrower. CDS markets are the most liquid of the three markets, allowing dealers to more easily assume long and short positions. Moreover, by entering into a CDS contract with another dealer, the firm also exposes itself to counterparty risk. This paper links data from these three different markets to create a more complete picture of how dealers assume and distribute credit risk. We identify key determinants of dealers' net and gross exposures to credit risk. We furthermore map out the interdealer network structures in these markets, allowing us to study how these network structures distribute risk among the dealers and how they shape the total risk borne by the system.