Syndicated Loans and CDS Positioning

48 Pages Posted: 11 Dec 2017

See all articles by Iñaki Aldasoro

Iñaki Aldasoro

Bank for International Settlements (BIS)

Andreas Barth

Goethe University Frankfurt - Department of Finance

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Date Written: December 2017

Abstract

This paper analyzes banks' usage of CDS. Combining bank-firm syndicated loan data with a unique EU-wide dataset on bilateral CDS positions, we find that stronger banks in terms of capital, funding and profitability tend to hedge more. We find no evidence of banks using the CDS market for capital relief. Banks are more likely to hedge exposures to relatively riskier borrowers and less likely to sell CDS protection on domestic firms. Lead arrangers tend to buy more protection, potentially exacerbating asymmetric information problems. Dealer banks seem insensitive to firm risk, and hedge more than non-dealers when they are more profitable. These results allow for a better understanding of banks' credit risk management.

Keywords: syndicated loans, CDS, speculation, capital regulation, EMIR, cross-border lending, asymmetric information

JEL Classification: G21, G28

Suggested Citation

Aldasoro, Iñaki and Barth, Andreas, Syndicated Loans and CDS Positioning (December 2017). BIS Working Paper No. 679, Available at SSRN: https://ssrn.com/abstract=3083815

Iñaki Aldasoro (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Andreas Barth

Goethe University Frankfurt - Department of Finance ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt, 60629
Germany

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