Abstract

http://ssrn.com/abstract=2316097
 
 

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The Transformation of Banking: Tying Loan Interest Rates to Borrowers' CDS Spreads


Ivan Ivanov


Board of Governors of the Federal Reserve System (FRB)

João A. C. Santos


Federal Reserve Bank of New York

Thu Vo


University of Rochester - Simon Business School

July 11, 2014

Simon School Working Paper No. FR 13-25

Abstract:     
We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.

Number of Pages in PDF File: 55

Keywords: Market-based pricing, loan spreads, loan covenants, CDS spreads

JEL Classification: G1, G21, G30

Accepted Paper Series


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Date posted: August 27, 2013 ; Last revised: July 12, 2014

Suggested Citation

Ivanov, Ivan and Santos, João A. C. and Vo, Thu, The Transformation of Banking: Tying Loan Interest Rates to Borrowers' CDS Spreads (July 11, 2014). Simon School Working Paper No. FR 13-25. Available at SSRN: http://ssrn.com/abstract=2316097 or http://dx.doi.org/10.2139/ssrn.2316097

Contact Information

Ivan Ivanov (Contact Author)
Board of Governors of the Federal Reserve System (FRB) ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
João A. C. Santos
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)
HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML
Thu Vo
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
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