Credit Derivatives, Disintermediation and Investment Decisions
Oxford Financial Research Centre Working Paper 2001-FE-01
31 Pages Posted: 2 Jun 2001
There are 2 versions of this paper
Credit Derivatives, Disintermediation and Investment Decisions
Date Written: May 2001
Abstract
The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that when entrepreneurs rely upon the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue sub-investment grade bonds instead, and to engage in second-best behaviour. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivatives.
Keywords: Credit derivative, monitoring, junk bonds, debt finance, capital structure.
JEL Classification: G24, G28, G34
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Innovations in Credit Risk Transfer: Implications for Financial Stability
-
Credit Risk Transfer and Contagion
By Franklin Allen and Elena Carletti
-
By Franklin Allen and Douglas M. Gale
-
Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis
-
Credit Risk Transfer and Financial Sector Performance
By Wolf Wagner and Ian W. Marsh
-
Credit Risk Transfer and Financial Sector Performance
By Wolf Wagner and Ian W. Marsh
-
Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations
By Guenter Franke and Jan Pieter Krahnen
-
The Liquidity of Bank Assets and Banking Stability
By Wolf Wagner