Credit derivatives and financial intermediation:
Saved in:
| Main Author: | |
|---|---|
| Format: | Thesis Book |
| Language: | English |
| Published: |
2000
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| Subjects: | |
| Online Access: | Inhaltsverzeichnis |
| Physical Description: | 274 S. Ill., graph. Darst. |
Staff View
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| 100 | 1 | |a Freiermuth, Martin |e Verfasser |4 aut | |
| 245 | 1 | 0 | |a Credit derivatives and financial intermediation |c vorgelegt von Martin Freiermuth |
| 264 | 1 | |c 2000 | |
| 300 | |a 274 S. |b Ill., graph. Darst. | ||
| 336 | |b txt |2 rdacontent | ||
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| 502 | |a St. Gallen, Univ., Diss., 2000 | ||
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Record in the Search Index
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| adam_text | Contents
List of Exhibits 8
Abbreviations 10
1 Introduction 12
1.1 Motivation 12
1.2 Definitions 16
1.3 The basic model 18
1.3.1 Bank, borrower and investor 18
1.3.2 Financial intermediaries as asset transformers 19
1.3.3 Phases of a lending cycle 23
1.4 Structure 24
1.4.1 Content 24
1.4.2 Approaches applied 29
Part I: Credit derivatives product characteristics,
risks and information
2 Products and market in credit derivatives 31
2.1 A brief history 31
2.2 Product structures and characteristics 33
2.2.1 Key determinants 33
2.2.2 Credit default products 35
2.2.3 Replication products 36
2.2.3.1 Total Return Swaps 36
2.2.3.2 Credit spread options and forwards 38
2.2.4 Credit linked notes 40
2.3 Current market for credit derivatives 43
2.3.1 Market size and types of participants 43
2.3.2 Product usage 44
2.3.3 The nature of the reference credits 45
1
3 Risks of credit derivatives 47
3.1 Product related risks 47
3.1.1 Legal risks 47
3.1.1.1 Overview 47
3.1.1.2 Are credit derivatives insurance contracts? 47
3.1.1.3 Confidentiality 48
3.1.1.4 Transferability 49
3.1.2 Liquidity risk 50
3.1.3 Counterparty risk 50
3.1.4 Model risk 53
3.1.5 Basis and correlation risk 54
3.1.5.1 Outline 54
3.1.5.2 Basis risk 54
3.1.5.3 Correlation risk 55
3.1.5.4 Documentation 56
3.2 Risks of credit derivatives for a bank 59
3.2.1 Operational risks 59
3.2.2 Bank insolvency risk: The model of Duffee and Zhou (1997).. 59
3.2.2.1 Assumptions 60
3.2.2.2 The bank s strategies: the loan sale market 61
3.2.2.3 The bank s strategies: the credit derivatives market 63
3.2.2.4 Conclusion 65
3.2.3 Relationship and reputation risks 66
3.2.4 Agency risk 68
3.3 Summary 69
4 The role of information in credit derivatives 71
4.1 Characteristics of information 71
4.2 The role of information in bank applications of credit derivatives.. 73
4.2.1 Management of credit lines 75
4.2.2 Diversification 75
4.2.3 Investment 75
2
4.3 Higher order information asymmetry and credit derivatives 76
4.3.1 Overview 76
4.3.2 Higher order beliefs: is there a risk of bubbles in the credit
market, and what is the effect of credit derivatives? 76
4.3.3 Information cascades in credit derivatives 79
Part II: Information asymmetry in lending and credit
derivatives
5 Information asymmetry and financial intermediation 81
5.1 Overview 81
5.2 Types of information asymmetry problems 84
5.2.1 Quality uncertainty: the problem of adverse selection 84
5.2.2 Moral hazard 86
5.2.2.1 A source of inefficiency 86
5.2.2.2 Types of moral hazard problems 87
5.2.2.3 Moral hazard in total return swaps 89
5.2.3 Hold up 98
5.2.3.1 Overview 98
5.2.3.2 Incomplete contracts 100
5.3 Methods for the reduction of information asymmetry 105
5.3.1 Incentives: monitoring, signalling and reputation 105
5.3.1.1 Delegated monitoring (Diamond (1984)) 106
5.3.1.2 Signalling (Leland and Pyle (1977)) 109
5.3.1.3 Reputation 111
5.3.2 The role of the market: competition, credit rationing, relationship
building 113
5.3.2.1 Competition 113
5.3.2.2 Credit Rationing 114
5.3.2.3 Relationship building 117
6 Information asymmetry between bank, borrower and investor.... 123
6.1 Information asymmetry and credit derivative confirmations 123
6.2 Characteristics of the bank 126
6.2.1 Relationship of the bank with the borrower 126
6.2.2 Internal organisation of the bank 126
3
6.2.3 Size and standing of the bank 127
6.2.4 Relationship of the bank with the investor 127
6.2.5 Definition of the recovery value 128
6.2.6 Synthesis of the characteristics 130
6.3 Repercussions on the borrower 132
6.3.1 Confidentiality 132
6.3.2 The borrower s freedom of movement 132
6.3.3 Negative signals. 132
6.4 The investor s position 133
6.4.1 Conclusion of the transaction 133
6.4.2 Settlement of the credit derivative transaction 134
Part III: Credit derivatives informational impact on the
lending cycle
7 Screening under credit derivatives 137
7.1 Overview 137
7.2 Rating: credit analysis and credit scoring 138
7.2.1 Recent improvements in credit risk measurement 138
7.2.2 Effects of credit derivatives 141
7.3 Pricing 142
7.3.1 Credit risk measurement 142
7.3.2 Portfolio vs. transaction pricing 144
7.4 The bank s incentives 146
7.4.1 Screening, rating and long term contracts 146
7.4.2 The long bank 147
7.4.3 The hedged bank 148
7.4.4 The short bank 150
8 Monitoring under credit derivatives 153
8.1 Overview 153
8.2 Analytic set up 155
8.2.1 The reference loan (without credit derivative) 155
8.2.2 The situation with credit derivative 156
4
8.3 The role and incentives of the bank 156
8.3.1 Overview of the possibilities 156
8.3.2 Principal in the loan 158
8.3.3 The agency problem in the credit protection relationship 160
8.3.3.1 The long bank 160
8.3.3.2 The hedged bank 160
8.3.3.3 The short bank 161
8.3.4 Pooling or separating equilibrium a non co operative
signalling game 162
8.3.4.1 Outline 162
8.3.4.2 Set up 162
8.3.4.3 Definition of the pay offs 164
8.3.4.4 The game in extensive form 165
8.3.4.5 The equilibrium outcome 167
8.3.5 The information risk premium in credit derivative pricing 170
8.3.6 The influence of timing in the use of credit derivatives 173
8.3.6.1 Outline 173
8.3.6.2 Full coverage 174
8.3.6.3 Early termination 175
8.3.6.4 Late start 177
8.3.7 The bank s internal conflicts of interest 177
8.4 Explicit and implicit contracts: incentive compatibility 179
8.4.1 Overview 179
8.4.2 Reputation 179
8.4.3 Relationship building 181
8.4.4 Competition 183
8.4.5 Risk sharing: collateral, equity, recourse, call covenants 184
9 Default under credit derivatives 186
9.1 Overview 186
9.2 Role of exposure and settlement option in default 187
9.2.1 The long bank (situations 1A 1C) 188
9.2.2 The hedged bank (situations 2A 2C) 189
9.2.3 The short bank (situations 3A 3C) 192
9.3 Differences with or without credit derivatives 194
9.3.1 Actions and motives 194
5
9.3.2 Investment of new funds 195
9.3.3 Debt forgiveness 197
9.4 Welfare effects of the bankruptcy procedure 201
9.4.1 Criteria for welfare efficiency 201
9.4.2 Assessment of credit derivatives 202
9.4.2.1 Maximisation of the ex post outcome 202
9.4.2.2 Incentive effects 205
Part IV: Implications for institutions and products
10 New types of intermediaries 208
10.1 Reduction of information asymmetry 208
10.1.1 Risk taking entity 209
10.1.2 Non risk taking intermediaries 209
10.2 The U.S. residential mortgage model 210
10.3 The investment banking type and its broker functions 212
10.3.1 Overview 212
10.3.2 A broker s intermediary functions 214
10.3.2.1 Transaction services 214
10.3.2.2 Financial advice 215
10.3.2.3 Screening and certification (rating) 216
10.3.2.4 Origination and issuance 217
10.3.3 Information sensitivity and the role of a monopolist specialist219
10.4 The re insurance model 222
10.5 Application to the credit derivatives market 225
11 Non idiosyncratic credit derivative 229
11.1 Overview 229
11.2 Industry specific hedge 230
11.3 Macro hedge 233
6
Part V: Summary and outlook
12 Credit derivatives and information asymmetry insights 236
12.1 Impacts on bank, borrower and investor 236
12.2 The bank s incentives 238
12.2.1 Screening 240
12.2.2 Monitoring 242
12.2.3 Default 244
12.3 Welfare effects of credit derivatives 245
13 Outlook 247
13.1 Credit derivatives in the Euro environment 247
13.2 Changes in banking: the role of credit derivatives 248
13.2.1 Recent banking industry trends 248
13.2.2 Disaggregation of credit risk related business processes 249
14 Credit derivatives and financial (dis ) intermediation? 253
Interviewees 256
References 257
7
List of Exhibits
Exhibit 1 1: Credit default swap and the structure of the bank 19
Exhibit 1 2: Phases of the lending cycle and risk coverage with credit
derivatives 23
Exhibit 2 1: Credit default swap and the structure within the bank 35
Exhibit 2 2: Total Return Swaps and the bank s structure and activities .... 38
Exhibit 2 3: Credit spread option and forward 39
Exhibit 2 4: Generic credit linked note structure 40
Exhibit 2 5: Chase Secured Loan Trust Notesm 41
Exhibit 2 6: Credit derivatives by participants (share of market volume).... 43
Exhibit 2 7: Product usage in the credit derivatives market, 1997 and 2000
(volume based) 45
Exhibit 2 8: Credit rating of reference credits 46
Exhibit 4 1: Role of information in credit derivatives applications 74
Exhibit 5 1: Forms of information asymmetries and agency costs 83
Exhibit 5 2: Pay off matrix of a total return swap under information
asymmetry 90
Exhibit 5 3: Pay offs for players A and B under different scenarios 92
Exhibit 5 4: Pay off matrix for scenario 1 92
Exhibit 5 5: Pay off matrix for scenario 2 94
Exhibit 5 6: Pay off matrix for scenario 3 94
Exhibit 5 7: Pay off matrix for scenario 4 95
Exhibit 5 8: Pay off matrix for scenario 3a 96
Exhibit 5 9: Pay off matrix for scenario 4a 96
Exhibit 5 10: Pay off matrix for scenario 4b 97
Exhibit 5 11: Loan rates across market structures 121
Exhibit 6 1: Stylised facts and information asymmetry 130
Exhibit 8 1: Necessity of monitoring a lending bank under credit derivatives
157
Exhibit 8 2: The signalling game between bank and investor 166
Exhibit 8 3: Tenor of credit derivative transactions 173
Exhibit 8 4: The bank s exposure due to the loan, base case 174
Exhibit 8 5: Perfectly hedged loan: risk free origination margin 175
8
Exhibit 8 6: Bank exposure under early termination of the credit derivative
175
Exhibit 8 7: Bank exposure under late start of the credit derivative 177
Exhibit 9 1: Impact of credit derivatives on the borrower by settlement type
and bank position 188
Exhibit 9 2: A hedged bank s actions and motives under fixed recovery
value 191
Exhibit 9 3: Actions and motives of a bank with and without credit
derivatives 194
Exhibit 9 4: A bank s net position and maximum loss 196
Exhibit 9 5: Bank position under physical settlement and dealer poll 198
Exhibit 9 6: Bank position under fixed recovery value 198
Exhibit 9 7: Net positions for different settlement options 199
Exhibit 9 8: Welfare effects of credit derivatives 207
Exhibit 10 1: Frequency of loan loss distribution and credit risk categories
224
Exhibit 11 1: Hedging efficiency of an industry protection product 232
Exhibit 12 1: The investor s optimal settlement option by contract phase 238
Exhibit 12 2: A bank s information asymmetry problems 239
Exhibit 12 3: The bank s screening incentives, information asymmetry
problems and potential solutions 240
Exhibit 12 4: The bank s monitoring incentives, information asymmetry
problems and potential solutions 242
Exhibit 12 5: The bank s incentives, information asymmetry problems and
potential solutions in borrower default 244
Exhibit 12 6: Welfare effects of credit derivatives 246
Exhibit 13 1: Commercial lending and the effect of credit derivatives 251
9
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| indexdate | 2024-07-09T18:45:46Z |
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| spelling | Freiermuth, Martin Verfasser aut Credit derivatives and financial intermediation vorgelegt von Martin Freiermuth 2000 274 S. Ill., graph. Darst. txt rdacontent n rdamedia nc rdacarrier St. Gallen, Univ., Diss., 2000 Derivat Wertpapier (DE-588)4381572-8 gnd rswk-swf Kreditgeschäft (DE-588)4134687-7 gnd rswk-swf Finanzintermediation (DE-588)4368756-8 gnd rswk-swf (DE-588)4113937-9 Hochschulschrift gnd-content Derivat Wertpapier (DE-588)4381572-8 s Kreditgeschäft (DE-588)4134687-7 s Finanzintermediation (DE-588)4368756-8 s DE-604 HBZ Datenaustausch application/pdf http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=009165781&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA Inhaltsverzeichnis |
| spellingShingle | Freiermuth, Martin Credit derivatives and financial intermediation Derivat Wertpapier (DE-588)4381572-8 gnd Kreditgeschäft (DE-588)4134687-7 gnd Finanzintermediation (DE-588)4368756-8 gnd |
| subject_GND | (DE-588)4381572-8 (DE-588)4134687-7 (DE-588)4368756-8 (DE-588)4113937-9 |
| title | Credit derivatives and financial intermediation |
| title_auth | Credit derivatives and financial intermediation |
| title_exact_search | Credit derivatives and financial intermediation |
| title_full | Credit derivatives and financial intermediation vorgelegt von Martin Freiermuth |
| title_fullStr | Credit derivatives and financial intermediation vorgelegt von Martin Freiermuth |
| title_full_unstemmed | Credit derivatives and financial intermediation vorgelegt von Martin Freiermuth |
| title_short | Credit derivatives and financial intermediation |
| title_sort | credit derivatives and financial intermediation |
| topic | Derivat Wertpapier (DE-588)4381572-8 gnd Kreditgeschäft (DE-588)4134687-7 gnd Finanzintermediation (DE-588)4368756-8 gnd |
| topic_facet | Derivat Wertpapier Kreditgeschäft Finanzintermediation Hochschulschrift |
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