Do Private Signals of a Bank's Creditworthiness Predict the Bank's CDS Price? Evidence from the Eurosystem's Overnight Loan Rates

49 Pages Posted: 15 Mar 2014

See all articles by Eero Tölö

Eero Tölö

Bank of Finland - Financial Markets

Esa Jokivuolle

Bank of Finland, Research Unit

Matti Viren

Bank of Finland - Research

Date Written: February 25, 2014

Abstract

We investigate the relationship between the daily average interbank overnight borrowing rate (AOR) and the credit default swap price (CDS) of 60 banks using the Eurosystem’s proprietary data from mid-2008 to mid-2013. We find that the AOR which is observable only by the competent Eurosystem authorities leads the CDS at least by one day. The lead was concentrated on days of market stress for banks which mainly borrow from “relationship” lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries.

Keywords: overnight loans rates, credit default swap, TARGET2, Eurosystem, early-warning indicators

JEL Classification: G01, G14, G21

Suggested Citation

Tölö, Eero and Jokivuolle, Esa and Viren, Matti, Do Private Signals of a Bank's Creditworthiness Predict the Bank's CDS Price? Evidence from the Eurosystem's Overnight Loan Rates (February 25, 2014). Bank of Finland Research Discussion Paper No. 9/2014, Available at SSRN: https://ssrn.com/abstract=2408539 or http://dx.doi.org/10.2139/ssrn.2408539

Eero Tölö

Bank of Finland - Financial Markets ( email )

P.O Box 160
FIN-00101 Helsinki
Finland

Esa Jokivuolle (Contact Author)

Bank of Finland, Research Unit ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2309 (Phone)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/jokivuolle_esa/

Matti Viren

Bank of Finland - Research ( email )

P.O Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2563 (Phone)
+358 10 831 2294 (Fax)

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