How Large Banks Use CDS to Manage Risks: Bank-Firm-Level Evidence

42 Pages Posted: 13 Jun 2015 Last revised: 20 Nov 2015

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Deming Wu

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: November 19, 2015

Abstract

We test five hypotheses on whether banks use CDS to hedge corporate loans, provide credit enhancements, obtain regulatory capital relief, and exploit banking relationship and private information. Using new data that link large banks’ CDS positions and syndicated lending on individual firms, we find strong evidence for the credit enhancement and regulatory capital relief hypotheses, but mixed evidence for the hedging, banking relationship, and private information hypotheses. Banks buy and sell more CDS on their borrowers, but their net CDS positions and lending status are largely unrelated. We find no evidence of bank using CDS to exploit private information.

Keywords: CDS, hedging, credit enhancement, regulatory capital relief, banking relationship, private information

JEL Classification: G14, G21, G23, G28, G32

Suggested Citation

Hasan, Iftekhar and Wu, Deming, How Large Banks Use CDS to Manage Risks: Bank-Firm-Level Evidence (November 19, 2015). Available at SSRN: https://ssrn.com/abstract=2617495 or http://dx.doi.org/10.2139/ssrn.2617495

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Deming Wu (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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