Financial Innovation and Bank Behavior: Evidence from Credit Markets

36 Pages Posted: 6 Apr 2011 Last revised: 24 Aug 2012

See all articles by Lars Norden

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Consuelo Silva Buston

Pontificia Universidad Católica de Chile - School of Business

Wolf Wagner

Erasmus University Rotterdam (EUR)

Date Written: 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.

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

JEL Classification: G21, G32, G01

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: https://ssrn.com/abstract=1800162 or http://dx.doi.org/10.2139/ssrn.1800162

Lars Norden

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

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Consuelo Silva Buston

Pontificia Universidad Católica de Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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