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CDS and credit: The effect of the bangs on credit insurance, lending and hedging

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  • Gündüz, Yalin
  • Ongena, Steven
  • Tümer-Alkan, Günseli
  • Yu, Yuejuan

Abstract

We assess the differential impacts of “Big Bang” and “Small Bang” contracts and convention changes on market participants across CDS markets and couple comprehensive bank-firm-level CDS trading data from the DTCC to the German credit register containing bi-lateral bank-firm credit exposures. We find that after the Bangs, the cost of buying CDS contracts becomes lower for non-dealer banks and that, because of this decrease in insurance costs, these banks extend relatively more credit to CDS-traded and affected firms compared to dealers, and hedge more effectively. Hence, standardization lowers the cost of credit insurance and leads to a relative increase in credit extensions by non-dealer banks.

Suggested Citation

  • Gündüz, Yalin & Ongena, Steven & Tümer-Alkan, Günseli & Yu, Yuejuan, 2025. "CDS and credit: The effect of the bangs on credit insurance, lending and hedging," Journal of Empirical Finance, Elsevier, vol. 81(C).
    • Handle: RePEc:eee:empfin:v:81:y:2025:i:c:s0927539825000052
    DOI: 10.1016/j.jempfin.2025.101583
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    Keywords

    Credit default swaps; Credit exposure; Hedging; Bank lending; Depository Trust and Clearing Corporation (DTCC);
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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