[ Article ]
Seoul Journal of Economics - Vol. 24, No. 4, pp. 575-591
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2011
Received 04 Oct 2010 Revised 10 Jan 2011 Accepted 11 Jan 2011
Determinants of Banks’ CDS Spreads and Policy Implications
Christopher Byungho Suh ; Yoonsok Lee
Research Fellow, Financial Industry & Institutions Division, Korea Institute of Finance, KFB Building, 4-1, 1-ga, Myong-dong, Chung-gu, Seoul 100-021, Korea, Tel: +82-2-3705-6322, Fax: +82-2-3705-6281 (bhsuh@kif.re.kr)
Corresponding Author, Research Fellow, International & Macroeconomic Finance Division, Korea Institute of Finance, KFB Building, 4-1, 1-ga, Myong-dong, Chung-gu, Seoul 100-021, Korea, Tel: +82-2-3705-6274, Fax: +82-2-3705-6285 (yslee@kif.re.kr)
JEL Classification: G15, G21, G38

This paper analyzes the determinants of CDS spreads of major international banks using the data period of 2005~2009, which includes the global financial crisis. Taking into account that CDS spreads of Korean banks, for example, rose sharply although they were financially solid preceding the crisis period, we consider macroeconomic variables that reflect the economic fundamentals and foreign liquidity conditions of the economy, in addition to the financial indicators of banks. Empirical results, based on a panel regression analysis of 40 major international banks, shows that macroeconomic variables such as the fiscal balance, foreign reserves, foreign exposure, and financial indicators such as bank’s capital, loan-to-asset ratio, and loan-to-deposit ratio matter significantly in determining banks’ CDS spreads. The results also show that certain variables became significant during the crisis period, which implies that it is important to manage and monitor certain variables during such periods.