Credit Default Swaps and Bank Loan Sales: Evidence from Bank Syndicated Lending
57 Pages Posted: 13 Jun 2015 Last revised: 22 Dec 2017
Date Written: December 21, 2017
We empirically examine three channels in the relation between banks’ CDS trading and loan sales. The substitute channel predicts a negative relation between CDS hedging and loan sales, and the complementary channel predicts a positive relation. The credit-enhancement channel predicts a positive relation between banks’ CDS selling and loan sales. Using syndicated loan share ownership data of U.S. banks over the period 2001–2013, we find that the complementary channel dominates the substitute channel, and the credit-enhancement channel plays an important role in bank loan sales.
Keywords: CDS, Loan sales, Hedging, Substitute channel, Complementary channel, Credit-enhancement channel
JEL Classification: G14, G21, G23, G28, G32
Suggested Citation: Suggested Citation