Abstract

http://ssrn.com/abstract=1800162
 
 

References (29)



 
 

Citations (2)



 


 



Financial Innovation and Bank Behavior: Evidence from Credit Markets


Lars Norden


Brazilian School of Public and Business Administration (EBAPE), Getulio Vargas Foundation (FGV)

Consuelo Silva Buston


ILADES-Universidad Alberto Hurtado

Wolf Wagner


Tilburg University, Department of Economics and the European Banking Center

December 23, 2011


Abstract:     
This paper investigates whether, and through which channel, the active use of credit derivatives changes bank behavior in the credit market, and how this channel was affected by the crisis of 2007-2009. Our principal finding is that banks with larger gross positions in credit derivatives charge significantly lower corporate loan spreads, while banks' net positions are not related to loan pricing. We argue that this is consistent with banks passing on risk management benefits to corporate borrowers but not with alternative channels through which credit derivative use may affect loan pricing. We also find that the magnitude of the risk management effect remained unchanged during the crisis period of 2007-2009. In addition, banks with larger gross positions in credit derivatives cut their lending by less than other banks during the crisis and have consistently lower loan charge-offs. In sum, our study is suggestive of significant risk management benefits from financial innovations that persist under adverse conditions -- that is, when they matter most.

Number of Pages in PDF File: 36

Keywords: Financial innovations, credit derivatives, syndicated loans, loan pricing, financial crisis

JEL Classification: G21, G32, G01


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Date posted: April 6, 2011 ; Last revised: August 24, 2012

Suggested Citation

Norden, Lars and Silva Buston, Consuelo and Wagner, Wolf, Financial Innovation and Bank Behavior: Evidence from Credit Markets (December 23, 2011). Available at SSRN: http://ssrn.com/abstract=1800162 or http://dx.doi.org/10.2139/ssrn.1800162

Contact Information

Lars Norden
Brazilian School of Public and Business Administration (EBAPE), Getulio Vargas Foundation (FGV) ( email )
Praia de Botafogo, 190
Rio de Janeiro, 22250-900
Brazil
+552137995759 (Phone)
Consuelo Silva Buston
ILADES-Universidad Alberto Hurtado ( email )
Erasmo Escala 1835
Santiago, 6500620
Chile
Wolf Wagner (Contact Author)
Tilburg University, Department of Economics and the European Banking Center ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
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