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Credit Derivatives and Bank Systemic Risk: Risk Enhancing or Reducing?

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  • Halili, Alba
  • Fenech, Jean-Pierre
  • Contessi, Silvio

Abstract

This study investigates the impact of credit derivative usage on U.S. bank holding companies' systemic risk from 2006 to 2018. The results show that an increase in bank holdings of credit derivatives subsequently increases their systemic risk. This is robust to a number of controls. Such findings have policy implications for regulators and market participants, as larger banks are in a higher risk category, potentially causing further disruption to financial markets.

Suggested Citation

  • Halili, Alba & Fenech, Jean-Pierre & Contessi, Silvio, 2021. "Credit Derivatives and Bank Systemic Risk: Risk Enhancing or Reducing?," Finance Research Letters, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:finlet:v:42:y:2021:i:c:s1544612321000118
    DOI: 10.1016/j.frl.2021.101930
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    References listed on IDEAS

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    1. Cowan, Arnold R. & Salotti, Valentina & Schenck, Natalya A., 2022. "The long-term impact of bank mergers on stock performance and default risk: The aftermath of the 2008 financial crisis✰," Finance Research Letters, Elsevier, vol. 48(C).

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    Keywords

    Credit derivatives; Systemic risk measures;

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