The Credit Risk of Banks and Non-Banks During the Crisis: Evidence from the CDS Market
40 Pages Posted: 17 Sep 2011
Date Written: September 16, 2011
Using three alternative decompositions of the credit default swap premium this study examines how investors judge the credit risk of banks and non-banks before, during, and after the financial crisis of 2007-2009. The empirical findings, based on a sample of 213 major US and European firms, suggest that investors clearly distinguish between both types of firms. Investors appear in general to be more concerned about bank defaults, and even more so since the end of the crisis. However, investors attach a low loss given default (LGD) to banks in normal times. During the crisis the estimated LGD’s increase markedly and the difference in the LGD between both types of firms becomes statistically insignificant. However, the estimated LGD for banks does usually not exceed the estimated LGD for non-banks.
Keywords: Banks, credit risk, credit default swap, financial crisis, loss given default, risk premium
JEL Classification: E43, G12, G13
Suggested Citation: Suggested Citation