Determinants of the Use of Credit Derivatives by Large Us Banks

26 Pages Posted: 12 Apr 2006

See all articles by Dawood Ashraf

Dawood Ashraf

Islamic Development Bank - Islamic Research and Training Institute

John A. Goddard

University of Wales, Swansea

Yener Altunbas

University of Wales, Bangor

Date Written: June 2005

Abstract

Credit derivatives enable banks to manage credit risk separately from other types of risk, by transferring selected credit risks to third parties. Recently, global credit derivative markets have expanded rapidly, but a relatively small number of banks still accounts for most of the credit derivative business transacted by the US banking sector. An empirical model is developed for the motivation for participation in credit derivative markets and, conditional on participation, the factors that determine the volume of business transacted. Participation in credit derivative markets appears to be subject to entry barriers, which tend to favour the largest banks. Banks that deal in other derivative products are more likely to transact credit derivatives. Banks that transact such business tend to hold less capital, hold riskier loan portfolios, and derive a relatively high proportion of their income from non-traditional sources.

Keywords: Banking, Credit derivatives

JEL Classification: G12, G21

Suggested Citation

Ashraf, Dawood and Goddard, John A. and Altunbas, Yener, Determinants of the Use of Credit Derivatives by Large Us Banks (June 2005). Available at SSRN: https://ssrn.com/abstract=895409 or http://dx.doi.org/10.2139/ssrn.895409

Dawood Ashraf (Contact Author)

Islamic Development Bank - Islamic Research and Training Institute ( email )

P.O. Box. 9201
Jeddah, 21413
Saudi Arabia

John A. Goddard

University of Wales, Swansea ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

Yener Altunbas

University of Wales, Bangor ( email )

Bangor, Gwynedd, Wales LL57 2DG
United Kingdom

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