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The Determinants of Global Bank Credit-Default-Swap Spreads

Author

Listed:
  • Iftekhar Hasan

    (Fordham University and Bank of Finland)

  • Liuling Liu

    (Bowling Green State University)

  • Gaiyan Zhang

    (University of Missouri-St. Louis)

Abstract

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.

Suggested Citation

  • Iftekhar Hasan & Liuling Liu & Gaiyan Zhang, 2016. "The Determinants of Global Bank Credit-Default-Swap Spreads," Journal of Financial Services Research, Springer;Western Finance Association, vol. 50(3), pages 275-309, December.
  • Handle: RePEc:kap:jfsres:v:50:y:2016:i:3:d:10.1007_s10693-015-0232-z
    DOI: 10.1007/s10693-015-0232-z
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    More about this item

    Keywords

    Credit default swaps; Structural models; CAMELS; Global banks; Bank regulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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