XML

Seoul Journal of Economics - Vol. 24 , No. 4

[ 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


Abstract

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.


Keywords: CDS spreads, Panel analysis, Foreign exposure

Acknowledgments

The authors would like to thank the participants of the KIF weekly seminar and helpful comments from Choi Seung Mo and David Cook. An earlier version of this paper was published in Korean as KIF Financial Research Report 2010-01. We especially thank Cheolbeom Park and Yeongseop Rhee for their insightful suggestions and comments. All remaining errors are ours.


References
1. Aizenman, J., and Pasricha, G. K. Selective Swap Agreements and the Global Financial Crisis. NBER Working Paper No. 14821, 2009.
2. Alexander, C., and Kaeck, A. “Regime Dependent Determinants of Credit Default Swap Spreads.” Journal of Banking and Finance 32 (No. 6 2008): 1008-21.
3. Blanco, R., Brennan, S., and Marsh, I. W. “An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps.” Journal of Finance 60 (No. 5 2005): 2255-81.
4. Duffie, D. “Credit Swap Valuation.” Financial Analysts Journal 55 (No. 1 1999): 73-87.
5. Eichengreen, B., and Mody, A. “What Explains Changing Spreads on Emerging Market Debt?” In Sebastian Edwards (ed.), Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies. Chicago: The University of Chicago Press, pp. 107-36, 1998.
6. Grandes, Martin. Convergence and Divergence of Sovereign Bond Spreads: Lessons from Latin America. OECD Development Centre Working Paper No. 200, 2002.
7. Houweling, P., and Vorst, T. “Pricing Default Swaps: Empirical Evidence.” Journal of International Money and Finance 24 (No. 8 2005): 1200-25.
8. Kamin, S. B., and von Kleist, K. The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s. BIS Working Papers No. 68, May, 1999.
9. Merton, R. C. “On the Pricing of Corporate Debt: the Risk Structure of Interest Rates.” Journal of Finance 29 (No. 2 1974): 449-70.
10. Park, C., and Seo, J. “Analysis of Determinants of External Debt.” International Finance Review. The Bank of Korea, 2006 (in Korean).
11. Zhang, B. Y., Zhou, H., and Zhu, H. Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms. BIS Working Papers No. 181, 2005.