Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 33/2014:
The determinants of global bank credit-default-swap spreads

Iftekhar Hasan (), Liuling Liu () and Gaiyan Zhang ()

Abstract: Using a sample of 161 global banks in 23 countries, we examine the applicability of structural models and bank fundamentals to price global bank credit risk. First, we find that variables predicted by structural models (leverage, volatility, and risk-free rate) are significantly associated with bank CDS spreads. Second, some CAMELS indicators, including asset quality, cost efficiency, and sensitivity to market risk, contain incremental information for bank CDS prices. 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 and/or more financial conglomerates restrictions tend to have lower CDS spreads. Deposit insurance appears to have an adverse effect on CDS spreads, indicating a moral hazard problem.

Keywords: bank credit default swaps; structural models; CAMELS; global banks; (follow links to similar papers)

JEL-Codes: G13; G15; G21; (follow links to similar papers)

45 pages, December 15, 2014

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