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Credit risk transfer activities and systemic risk how banks became less risky individually but posed greater risks to the financial system at the same time

A main cause of the crisis of 2007-2009 is the various ways through which banks have transferred credit risk in the financial system. We study the systematic risk of banks before the crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing Collateralized Loan Ob... Full description

Journal Title: Journal of banking & finance 2011, Vol.35(6), pp. 1391-1398
Main Author: Nijskens, Rob
Format: Electronic Article Electronic Article
Language: English
Subjects:
ID: ISSN: 0378-4266
Link: http://gso.gbv.de/DB=2.1/PPNSET?PPN=666384096
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recordid: gbv666384096
title: Credit risk transfer activities and systemic risk how banks became less risky individually but posed greater risks to the financial system at the same time
format: Article
creator:
  • Nijskens, Rob
subjects:
  • Verbriefung
  • Derivat
  • Subprime-Krise
  • Finanzkrise
  • Welt
  • 2007-2009
ispartof: Journal of banking & finance, 2011, Vol.35(6), pp. 1391-1398
description: A main cause of the crisis of 2007-2009 is the various ways through which banks have transferred credit risk in the financial system. We study the systematic risk of banks before the crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing Collateralized Loan Obligations (CLOs). After their first usage of either risk transfer method, the share price beta of these banks increases significantly. This suggests the market anticipated the risks arising from these methods, long before the crisis. We additionally separate this beta effect into a volatility and a market correlation component. Quite strikingly, this decomposition shows that the increase in the beta is solely due to an increase in banks' correlations. Thus, while banks may have shed their individual credit risk, they actually posed greater systemic risk. This creates a challenge for financial regulation, which has typically focused on individual institutions. All rights reserved, Elsevier
language: eng
source:
identifier: ISSN: 0378-4266
fulltext: fulltext
issn:
  • 03784266
  • 0378-4266
url: Link


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descriptionA main cause of the crisis of 2007-2009 is the various ways through which banks have transferred credit risk in the financial system. We study the systematic risk of banks before the crisis, using two samples of banks respectively trading Credit Default Swaps (CDS) and issuing Collateralized Loan Obligations (CLOs). After their first usage of either risk transfer method, the share price beta of these banks increases significantly. This suggests the market anticipated the risks arising from these methods, long before the crisis. We additionally separate this beta effect into a volatility and a market correlation component. Quite strikingly, this decomposition shows that the increase in the beta is solely due to an increase in banks' correlations. Thus, while banks may have shed their individual credit risk, they actually posed greater systemic risk. This creates a challenge for financial regulation, which has typically focused on individual institutions. All rights reserved, Elsevier
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