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Credit default swaps and regulatory capital relief: Evidence from European banks

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  • Thornton, John
  • Tommaso, Caterina di

Abstract

In a sample of European banks, we find that credit default swaps (CDS) are used for regulatory arbitrage to lower capital requirements and facilitate greater risk taking. Moreover, CDS-using banks generate higher returns on capital from the lower risk weighted assets they hold relative to banks that do not use CDS.

Suggested Citation

  • Thornton, John & Tommaso, Caterina di, 2018. "Credit default swaps and regulatory capital relief: Evidence from European banks," Finance Research Letters, Elsevier, vol. 26(C), pages 255-260.
    • Handle: RePEc:eee:finlet:v:26:y:2018:i:c:p:255-260
    DOI: 10.1016/j.frl.2018.02.008
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    References listed on IDEAS

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    1. repec:bla:jfinan:v:43:y:1988:i:2:p:375-96 is not listed on IDEAS
    2. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
    3. Jill Cetina, 2015. "More Transparency Needed For Bank Capital Relief Trades," Briefs 15-04, Office of Financial Research, US Department of the Treasury.
    4. William R. Cline, 2017. "The Right Balance for Banks: Theory and Evidence on Optimal Capital Requirements," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 7212, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Fiedor, Paweł & Killeen, Neill, 2021. "Securitisation special purpose entities, bank sponsors and derivatives," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    2. González-Fernández, Marcos & González-Velasco, Carmen, 2020. "An alternative approach to predicting bank credit risk in Europe with Google data," Finance Research Letters, Elsevier, vol. 35(C).
    3. Caterina Di Tommaso, 2022. "Securitization and CDS in U.S. bank lending," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1120-1133, January.

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    More about this item

    Keywords

    Credit default swaps; Regulatory arbitrage; European banks;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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