Journal of Financial Services Research

, Volume 50, Issue 3, pp 275–309 | Cite as

The Determinants of Global Bank Credit-Default-Swap Spreads

  • Iftekhar Hasan
  • Liuling Liu
  • Gaiyan ZhangEmail author


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.


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.


  1. Altman E (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J Financ 23(4):589–609CrossRefGoogle Scholar
  2. Annaert J, De Ceuster M, Van Roy P, Vespro C (2013) What determines euro area bank CDS spreads? J Int Money Financ 32:444–461CrossRefGoogle Scholar
  3. Arora N, Richardson S, Tuna I (2014) Asset reliability and security prices: evidence from credit markets. Rev Acc Stud 19(1):363–395CrossRefGoogle Scholar
  4. 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
  5. Barakova I (2014) Do banks' internal Basel risk estimates reflect risk? J of Financ Stab 13:167–179CrossRefGoogle Scholar
  6. Barth J, Caprio G, Levine R (2004) Bank regulation and supervision: what works best? J Financ Intermed 13:205–248CrossRefGoogle Scholar
  7. Barth JR, Caprio G, Levine R (2006) Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, CambridgeGoogle Scholar
  8. Barth JR, Caprio G, Levine R (2008) Bank regulations are changing: for better or worse?”. Comp Econ Stud 50:537–563CrossRefGoogle Scholar
  9. Beltratti A, Stulz RM (2012) The credit crises around the globe: why did some banks perform better? J Financ Econ 105:1–17CrossRefGoogle Scholar
  10. Benkert C (2004) Explaining credit default swap premia. J Futur Mark 24:71–92CrossRefGoogle Scholar
  11. Berger A, Herring R, Szegö G (1995) The role of capital in financial institutions. J Bank Financ 19:393–430CrossRefGoogle Scholar
  12. Blanco R, Brennan S, Marsh I (2005) An empirical analysis of the dynamic relationship between investment-grade bonds and credit default swaps. J Financ 60:2255–2281CrossRefGoogle Scholar
  13. Brewer E, Kaufman G, Wall L (2008) Bank capital ratios across countries: why do they vary? J Financ Serv Res 34:177–201CrossRefGoogle Scholar
  14. Callen JL, Livnat J, Segal D (2009) The impact of earnings on the pricing of credit default swaps. Account Rev 84(5):1363–1394CrossRefGoogle Scholar
  15. Campbell, John T., and Glen B. Taksler, 2003, Equity volatility and corporate bond yields, J Financ 58, 2321—2349.Google Scholar
  16. Chen L, Collin-Dufresne P, Goldstein RS (2009) On the relation between the credit spread puzzle and the equity premium puzzle. Rev Financ Stud 22(9):3367–3409CrossRefGoogle Scholar
  17. 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
  18. 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
  19. Collin-Dufresne P, Goldstein RS, Martin JS (2001) The determinants of credit spread changes. J Financ 56(6):2177–2207CrossRefGoogle Scholar
  20. Das SR, Hanouna P, Sarin A (2009) Accounting-based versus market-based cross-sectional models of CDS spreads. J Bank Financ 33:719–730CrossRefGoogle Scholar
  21. Demirguc-Kunt A, Laeven L, Levine R (2004) Regulations, market structure, institutions, and the cost of financial intermediation. J Money Credit Bank 36:593–622CrossRefGoogle Scholar
  22. Diamond D, Rajan R (2000) A theory of bank capital. J Financ 55:2431–2465CrossRefGoogle Scholar
  23. Driessen J (2005) Is default event risk priced in corporate bonds? Rev Financ Stud 18:165–195CrossRefGoogle Scholar
  24. Duffee GR (1998) The relation between treasury yields and corporate bond yield spreads. J Financ 53:2225–2242CrossRefGoogle Scholar
  25. Eichengreen B, Mody A, Nedeljkovic M, Sarno L (2012) How the subprime crisis went global: evidence from bank credit default swap spreads. J Int Money Financ 31(5):1299–1318CrossRefGoogle Scholar
  26. Ericsson J, Jacobs K, Oviedo R (2009) The determinants of credit default swap premia. J Financ Quant Anal 44(2):109–132CrossRefGoogle Scholar
  27. Flannery M (1994) Debt maturity and the deadweight cost of leverage: optimally financing banking firms. Am Econ Rev 84:320–331Google Scholar
  28. Fung H, Sierra G, Yau J, Zhang G (2008) Are the U.S. stock market and credit default swap market related? Evidence from the CDX indices. J Altern Invest 11(1):43–61CrossRefGoogle Scholar
  29. Gorton G, Rosen R (1995) Corporate control portfolio choice, and the decline of banking. J Financ 50:1377–1420CrossRefGoogle Scholar
  30. Houston JF, Lin L, Lin P, Ma Y (2010) Creditor rights, information sharing, and bank risk taking. J Financ Econ 96:485–512CrossRefGoogle Scholar
  31. 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
  32. Hull J, Predescu M, White A (2004) The relationship between credit default swap spreads, bond yields, and credit rating announcements. J Bank Financ 28(11):2789–2811CrossRefGoogle Scholar
  33. Jin JY, Kanagaretnam K, Lobo GJ (2011) Ability of accounting and audit quality variables to predict bank failures during the recent financial crisis. J Bank Financ 35:2811–2819CrossRefGoogle Scholar
  34. 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
  35. La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R (1998) Law and finance. J Polit Econ 106:1113–1155CrossRefGoogle Scholar
  36. Laeven L, Levine R (2007) Is there a diversification discount in financial conglomerates? J Financ Econ 85(2):331–367CrossRefGoogle Scholar
  37. Laeven L, Levine R (2009) Bank governance, regulation, and risk taking. J Financ Econ 93:259–275CrossRefGoogle Scholar
  38. Laeven L, Levine R (2010) Bank governance, regulation and risk taking. J Financ Econ 93(2):259–275CrossRefGoogle Scholar
  39. Merton RC (1974) On the pricing of corporate debt: the risk structure of interest rates. J Financ 29(2):449–470Google Scholar
  40. Neter J, Wasserman W, Kutner MH (1985) Applied linear statistical models, Second edn. Irwin, Homewood, ILGoogle Scholar
  41. Norden L, Weber M (2004) Informational efficiency of credit default swap and stock markets: the impact of credit rating announcements. J Bank Financ 28(11):2813–2843CrossRefGoogle Scholar
  42. Otker-Robe I, Podpiera J (2010) The fundamental determinants of credit default risk for European large complex financial institutions, IMF working paper.Google Scholar
  43. Peltonen TA, Scheicher M, Vuillemey G (2014) The network structure of the CDS market and its determinants. J Financ Stab 13:118–133CrossRefGoogle Scholar
  44. Petersen M (2009) Estimating standard errors in finance panel data sets: comparing approaches. Rev Financ Stud 22(1):435–480CrossRefGoogle Scholar
  45. Rodríguez-Moreno M, Peña JI (2013) Systemic risk measures: the simpler the better? J Bank Financ 37:1817–1831CrossRefGoogle Scholar
  46. Shivakumar L, Urcan O, Vasvari FP, Zhang L (2011) The debt market relevance of management earnings forecasts: evidence from before and during the credit crisis. Rev Acc Stud 16(3):464–486CrossRefGoogle Scholar
  47. Tang DY, Yan H (2006) Macroeconomic conditions, firm characteristics, and credit spreads. J Financ Serv Res 29:177–210CrossRefGoogle Scholar
  48. Tang DY, Yan H (2010) Market conditions, default risk and credit spreads. J Bank Financ 34:743–753CrossRefGoogle Scholar
  49. Tian S, Yang Y, Zhang G (2013) Bank capital, interbank contagion, and bailout policy. J Bank Financ 37(8):2765–2778CrossRefGoogle Scholar
  50. Vuong QH (1989) Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica 57(2):307–333CrossRefGoogle Scholar
  51. Zhang G, Zhang S (2013) Information efficiency of the U.S. credit default swap market: Evidence from Earnings surprises. J Financ Stab 9(4):720–730CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Fordham University and Bank of FinlandNew YorkUSA
  2. 2.College of BusinessBowling Green State UniversityBowling GreenUSA
  3. 3.College of Business AdministrationUniversity of Missouri-St. LouisSt. LouisUSA

Personalised recommendations