Market discipline and too-big-to-fail in the CDS market: Does banks' size reduce market discipline?
This paper examines market discipline in the credit default swap (CDS) market and the potential distortion of CDS spreads which arises when a bank is thought to be too-big-to-fail. Overall, we find evidence for market discipline in the CDS market. However, CDS prices are distorted by a size effect when a bank is considered to be too-big-to-fail. A 1 percentage point increase in size reduces the CDS spread of a bank by about 2 basis points. We further find that some banks have already reached a size that makes them too-big-to-be-rescued. While the price distortion for these banks decreases, the existence of banks that are considered to be too-big-to-rescue raises important new issues for banking supervisors.
Year of publication: |
2011
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Authors: | Völz, Manja ; Wedow, Michael |
Published in: |
Journal of Empirical Finance. - Elsevier, ISSN 0927-5398. - Vol. 18.2011, 2, p. 195-210
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Publisher: |
Elsevier |
Keywords: | Market discipline Too-big-to-fail Too-big-to-rescue CDS spreads |
Saved in:
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