CDS Pricing and Accounting Disclosures: Evidence from U.S. Bank Holding Corporations Around the Recent Financial Crisis

47 Pages Posted: 1 Feb 2016

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration

Sanjian Bill Zhang

California State University Long Beach

Date Written: November 17, 2015

Abstract

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

Kanagaretnam, Kiridaran and Zhang, Gaiyan and Zhang, Sanjian, CDS Pricing and Accounting Disclosures: Evidence from U.S. Bank Holding Corporations Around the Recent Financial Crisis (November 17, 2015). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2692276

Kiridaran Kanagaretnam

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Gaiyan Zhang (Contact Author)

University of Missouri at St. Louis - College of Business Administration ( email )

One University Blvd
St. Louis, MO 63121
United States

Sanjian Zhang

California State University Long Beach ( email )

1250 Bellflower Blvd.
Long Beach, CA 90840
United States

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