CDS Pricing and Accounting Disclosures: Evidence from U.S. Bank Holding Corporations Around the Recent Financial Crisis
47 Pages Posted: 1 Feb 2016
Date Written: November 17, 2015
We investigate what accounting information is important for explaining the credit risk for U.S. bank holding corporations (BHCs) during the recent crisis and find that several CAMELS variables are significantly associated with credit default swap (CDS) spreads. Consistent with industry experience, BHCs with more real estate loans do have higher credit risk as measured by CDS spread. With the newly available finer disclosures for the securities account, we find a positive association between risky assets-backed securities (ABS) and CDS spreads. Our results confirm real estate risk as a major risk for U.S. BHCs during the recent financial crisis. Moreover, our study highlights the importance of distinguishing loans/securities investments by type in understanding the relationship between accounting information and bank credit risk. In addition, we do not find significant association between several accounting-based risk measures and the CDS spread, a forward-looking market-based risk measure.
Keywords: Credit default swaps; CAMELS; Credit crisis; Risk pricing; Accounting disclosures
JEL Classification: G12, G21, M41
Suggested Citation: Suggested Citation