Credit Market Choice
Abstract: Credit default swaps (CDS) are frequently credited with being the cause of AIG?s collapse during the financial crisis. A Reuters article from September 2008, for example, notes ?[w]hen you hear that the collapse of AIG [?] might lead to a systemic collapse of the global financial system, the feared culprit is, largely, that once-obscure [?] instrument known as a credit default swap.? Yet, despite the prominent role that CDS played during the financial crisis, little is known about how individual financial institutions utilize CDS contracts on individual companies. In a recent New York Fed staff report, we assess the choice banks face when trading the idiosyncratic credit risk of a firm, and argue that banks? participation decisions have been affected in the post-regulation period, either by direct changes in market structure or by changes in the relative cost of pursuing different strategies.
JEL Classification: G3;
File(s): File format is text/html https://libertystreeteconomics.newyorkfed.org/2018/10/credit-market-choice.html
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2018-10-17