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Credit Derivatives, Disintermediation and Investment Decisions

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  • Alan Morrison

Abstract

The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that when entrepreneurs rely upon the certification value of bank debts to obtain cheap bond market insurance, the existance of a credit derivatives market may cause them to issue sub-investment grade bonds instead, and to engage in second-best behaviour. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivatives.

Suggested Citation

  • Alan Morrison, 2000. "Credit Derivatives, Disintermediation and Investment Decisions," OFRC Working Papers Series 2001fe01, Oxford Financial Research Centre.
    • Handle: RePEc:sbs:wpsefe:2001fe01
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    File URL: http://www.finance.ox.ac.uk/file_links/finecon_papers/2001fe01.pdf
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