Credit Default Swaps and Bank Loan Sales: Evidence from Bank Syndicated Lending

41 Pages Posted: 2 May 2016  

Iftekhar Hasan

Gabelli School of Business, Fordham University; Bank of Finland

Deming Wu

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

Date Written: 2016

Abstract

Do banks use credit default swap hedging to substitute for loan sales? By tracking banks’ lending exposures and CDS positions on individual firms, we find that banks use CDS hedging to complement rather than to substitute for loan sales. Consequently, bank loan sales are higher for firms that are actively traded in the CDS market. In addition, we find evidence that suggests that banks sell CDS protection as credit enhancements to facilitate loan sales. This study employs identification strategies similar to the “twin study” design to separate the effects of borrower-side and lender-side factors, and to minimize the omitted-variables bias.

Keywords: G14, G21, G23, G28, G32, loan sales, hedging, credit enhancement, regulatory capital relief, banking

Suggested Citation

Hasan, Iftekhar and Wu, Deming, Credit Default Swaps and Bank Loan Sales: Evidence from Bank Syndicated Lending (2016). Bank of Finland Research Discussion Paper No. 9/2016; Gabelli School of Business, Fordham University Research Paper No. 2772963. Available at SSRN: https://ssrn.com/abstract=2772963

Iftekhar Hasan (Contact Author)

Gabelli School of Business, Fordham University ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Deming Wu

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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