Discussion Paper

The Transformation of Banking: Tying Loan Interest Rates to Borrowers' Credit Default Swap Spreads

Abstract: Banks? practice of tying loan interest rates to borrowers? credit default swap (CDS) spreads constitutes one of the most recent financial innovations. In this post, I discuss evidence from a research project, undertaken with Ivan Ivanov and Thu Vo, showing that this practice has lowered the cost of bank credit. I also discuss some potential drawbacks of this innovation.

Keywords: CDS spreads; Interest Rates; Banking;

JEL Classification: G2;G1;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2014-02-10

Number: 20140210