Credit Derivatives, Disintermediation and Investment Decisions
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.
|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.finance.ox.ac.uk|
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