The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads

26 Pages Posted: 22 Aug 2015 Last revised: 15 Nov 2016

See all articles by Jill Cetina

Jill Cetina

Government of the United States of America - Office of Financial Research

Bert Loudis

Government of the United States of America - Office of Financial Research

Date Written: May 13, 2015

Abstract

This paper examines the relationship between banks’ observed credit default swap (CDS) spreads and possible measures of systemic importance. We use five-year CDS spreads from Markit with an international sample of 71 banks to investigate whether market participants are giving them a discount on borrowing costs based on the expectation that governments would consider them “too big to fail.” We find a consistent, statistically significant negative relationship between five-year CDS spreads and nine different systemic importance indicators using a generalized least squares (GLS) model. The paper finds that banks perceived as too big to fail have CDS spreads 44 to 80 basis points lower than other banks, depending on the asset-size threshold and controls used. Additionally, the study suggests market participants pay more attention to asset size than to a more complex measure, such as designation as a globally systemically important bank (G-SIB), that includes additional factors, such as substitutability and interconnectedness. Lastly, the model suggests that asset size acts as a threshold effect, rather than a continuous effect with the best fitting models using asset-size thresholds of $50 billion to $150 billion.

Keywords: Banking, too big to fail, size effect, heightened prudential regulation

JEL Classification: G01, G21, G22, G24, G28

Suggested Citation

Cetina, Jill and Loudis, Bert, The Influence of Systemic Importance Indicators on Banks’ Credit Default Swap Spreads (May 13, 2015). Office of Financial Research Working Paper No. 15-09 and Journal of Risk Management in Financial Institutions (volume 9, January 2016), Available at SSRN: https://ssrn.com/abstract=2648466 or http://dx.doi.org/10.2139/ssrn.2648466

Jill Cetina (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Bert Loudis

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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