Working Paper: CEPR ID: DP16744
Authors: Yalin Gndz; Steven Ongena; Gnseli Tmeralkan; Yuejuan Yu
Abstract: Does the cost of credit insurance affect the availability of credit? To answer this question, we couple comprehensive bank-firm level CDS trading data from DTCC to the German credit register containing bilateral bank-firm credit exposures. We assess the differential impact on market participants of the “Big Bang” and “Small Bang” standardization across CDS markets. We find that after the Bangs, the cost of buying CDS contracts becomes lower for non-dealer banks, and that – because of this decrease in insurance cost – these banks extend more credit to CDS traded and affected firms, and also hedge more effectively.
Keywords: credit default swaps; credit exposure; hedging; bank lending; depository trust and clearing corporation; dtcc
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower CDS costs (G19) | increased credit supply (E51) |
| big bang and small bang events (E32) | lower CDS costs (G19) |
| lower CDS costs (G19) | more credit extended to affected firms (G32) |
| big bang and small bang events (E32) | non-dealer banks hedge credit exposures more effectively (G21) |
| non-dealer banks hedge credit exposures more effectively (G21) | increased credit extended to firms (G32) |
| lower CDS costs (G19) | improved hedging effectiveness for non-dealer banks (G21) |
| lower CDS costs (G19) | decrease in transaction costs (D23) |