Credit Derivatives and Loan Pricing

34 Pages Posted: 27 Feb 2007 Last revised: 12 May 2011

See all articles by Lars Norden

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE)

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Date Written: November 29, 2007

Abstract

This paper examines the relation between the new markets for credit default swaps (CDS) and banks' pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional explanatory factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that CDS prices contain, beyond general credit risk, to a substantial extent information relevant for bank lending. We also find that, over time, new information from CDS markets is faster in-corporated into loans, but information from other markets is not. Overall, our results indicate that the markets for CDS have gained an important role for banks.

Keywords: Banks, Syndicated lending, Loan rates, Credit derivatives, Credit spreads

JEL Classification: G10, G21

Suggested Citation

Norden, Lars and Wagner, Wolf, Credit Derivatives and Loan Pricing (November 29, 2007). Available at SSRN: https://ssrn.com/abstract=965812 or http://dx.doi.org/10.2139/ssrn.965812

Lars Norden (Contact Author)

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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