The Determinants of Global Bank Credit-Default-Swap Spreads
- 711 Downloads
Using a sample of 161 global banks in 23 countries, we examine the applicability of market-based structural models and accounting-based bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models are significantly associated with bank CDS spreads. Second, some CAMELS indicators contain incremental information for bank CDS prices. We find no evidence in favor of one model over the other, while the combined structural and CAMELS model performs better than each individual model. Moreover, leverage and asset quality have had a stronger impact on bank CDS since the onset of the recent financial crisis. Banks in countries with lower stock market volatility, fewer entry barriers, and/or more financial conglomerate restrictions tend to have lower credit risk. Deposit insurance appears to have an adverse effect on bank CDS spreads, indicating a moral hazard problem.
Keywords:Credit default swaps, Structural models, CAMELS, Global banks, Bank regulation
We thank the insightful and constructive comments and suggestions from one anonymous referee, the associate Editor Prof. Sanjiv Das and Editor Haluk Ünal. Gaiyan Zhang acknowledges the funding from Office of International Studies and Programs of University of Missouri-St. Louis.
- Augustin P, Subrahmanyam MG, Tang DY, Wang SQ (2014). Credit default swaps: a survey. Foundations and Trends in Finance 9(1–2):1–196Google Scholar
- Barth JR, Caprio G, Levine R (2006) Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, CambridgeGoogle Scholar
- Campbell, John T., and Glen B. Taksler, 2003, Equity volatility and corporate bond yields, J Financ 58, 2321—2349.Google Scholar
- Chiaramonte, L. and Casu, B., 2013, The determinants of bank CDS spreads: evidence from the financial crisis, European J Finance, Vol 19, p861–887.Google Scholar
- Cole RA, White LJ (2011) Déjà Vu all over again: the causes of commercial bank failures this time around. J Financ Serv Res 42(1–2):5–29Google Scholar
- Flannery M (1994) Debt maturity and the deadweight cost of leverage: optimally financing banking firms. Am Econ Rev 84:320–331Google Scholar
- Huang, J.-Z. and Huang, M. 2012, How much of the corporate-treasury yield spread is due to credit risk? Rev of Asset Pricing Stud 2(2): 153–202.Google Scholar
- King TB, Nuxoll DA, Yeager TJ (2006) Are the causes of bank distress changing? Can researchers keep up? Fed Reserv Bank St. Louis Rev 88:57–80Google Scholar
- Merton RC (1974) On the pricing of corporate debt: the risk structure of interest rates. J Financ 29(2):449–470Google Scholar
- Neter J, Wasserman W, Kutner MH (1985) Applied linear statistical models, Second edn. Irwin, Homewood, ILGoogle Scholar
- Otker-Robe I, Podpiera J (2010) The fundamental determinants of credit default risk for European large complex financial institutions, IMF working paper.Google Scholar