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    ESRB Working Paper on Syndicated Loans and CDS Positioning

    November 15, 2017

    ESRB published a working paper that analyzes banks’ usage of credit default swaps (CDS). For this study, the authors combined loan-level data from the syndicated loan market, balance sheet data for banks, and a unique dataset on bilateral CDS positions for all EU counterparties, available at ESRB following the EMIR regulation.

    On combining bank-firm syndicated loan data with a unique EU-wide dataset on bilateral CDS positions, the authors found that stronger banks in terms of capital, funding, and profitability tend to hedge more. No evidence was found that banks use 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.

     

    Related Link: Working Paper (PDF)

    Keywords: Europe, EU, Securities, EMIR, Syndicated Loans, CDS, Credit Risk, Systemic Risk, ESRB

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