Research Discussion Papers, Bank of Finland
No 31/2006:
The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns
Ian W Marsh ()
Abstract: Although innovative credit risk transfer techniques help
to allocate risk more optimally, policymakers worry that they may
detrimentally affect the effort spent by financial intermediaries in
screening and mo-nitoring credit exposures. This paper examines the equity
market’s response to loan announcements. In common with the literature it
reports a significantly positive average excess return – the well known
‘bank certification’ effect. However, if the lending bank is known to
actively manage its credit risk ex-posure through large-scale
securitization programmes, the magnitude of the effect falls by two thirds.
The equity market does not appear to place any value on news of loans
extended by banks that are known to transfer credit risk off their
books.
Keywords: bank loans; credit derivatives; bank certification; (follow links to similar papers)
JEL-Codes: G12; G21; (follow links to similar papers)
33 pages, December 12, 2006
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