CREDIT DEFAULT SWAPS AND BANK SAFETY
Abstract
In this analysis we find evidence that credit default swap (CDS) purchases
increase bank safety. Specifically, we show banks which were net buyers of
CDS had smaller increases in loan loss reserves in response to the COVID-19
crisis. Previous research had speculated that bank CDS purchases caused
increased risk-taking by banks which offset the effect of the hedge. This anal-
ysis contributes to this literature on the effect of hedging on bank risk taking
and capital structure. Moreover, since our results are consistent with CDS
being effectively used to hedge, our results have implications for systemic
risk.
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Copyright (c) 2022 Matt Brigida
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