Financial innovation and bank behavior: Evidence from credit markets

L. Norden, C.F. Silva Buston, W.B. Wagner

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper investigates whether, and through which channel, the active use of credit derivatives changes bank behavior in the credit market, and how this channel was affected by the crisis of 2007–2009. Our principal finding is that banks with larger gross positions in credit derivatives charge significantly lower corporate loan spreads, while banks׳ net positions are not consistently related to loan pricing. We argue that this is consistent with banks passing on risk management benefits to corporate borrowers but not with alternative channels through which credit derivative use may affect loan pricing. We also find that the magnitude of the risk management effect remained unchanged during the crisis period of 2007–2009. In addition, banks with larger gross positions in credit derivatives cut their lending by less than other banks during the crisis and have consistently lower loan charge-offs. In sum, our study is suggestive of significant risk management benefits from financial innovations that persist under adverse conditions – that is, when they matter most.
Original languageEnglish
Pages (from-to)130-145
JournalJournal of Economic Dynamics and Control
Volume43
DOIs
Publication statusPublished - Jun 2014

Fingerprint

Innovation
Risk management
Derivatives
Risk Management
Derivative
Gross
Pricing
Charge
Costs
Evidence
Market
Banks
Credit markets
Financial innovation
Credit derivatives
Alternatives
Crisis
Loans
Loan pricing

Keywords

  • financial innovation
  • credit derivatives
  • syndicated loans
  • loan pricing
  • financial crises

Cite this

Norden, L. ; Silva Buston, C.F. ; Wagner, W.B. / Financial innovation and bank behavior : Evidence from credit markets. In: Journal of Economic Dynamics and Control. 2014 ; Vol. 43. pp. 130-145.
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Financial innovation and bank behavior : Evidence from credit markets. / Norden, L.; Silva Buston, C.F.; Wagner, W.B.

In: Journal of Economic Dynamics and Control, Vol. 43, 06.2014, p. 130-145.

Research output: Contribution to journalArticleScientificpeer-review

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