Tying Loan Interest Rates to Borrowers' CDS Spreads

56 Pages Posted: 31 May 2017

See all articles by Ivan Ivanov

Ivan Ivanov

Board of Governors of the Federal Reserve System

João A. C. Santos

Federal Reserve Bank of New York

Thu Vo

Amherst Securities Group LP

Multiple version iconThere are 2 versions of this paper

Date Written: 2014-06-11

Abstract

We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.

Keywords: Market-based pricing, loan spreads, loan covenants, CDS spreads

JEL Classification: G10, G21, G30

Suggested Citation

Ivanov, Ivan and Santos, João A. C. and Vo, Thu, Tying Loan Interest Rates to Borrowers' CDS Spreads (2014-06-11). FEDS Working Paper No. 2014-70. Available at SSRN: https://ssrn.com/abstract=2976978

Ivan Ivanov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Thu Vo

Amherst Securities Group LP ( email )

5001 Plaza on the Lake
Suite 200
Austin, TX 78730
United States

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