Credit Derivatives, Disintermediation, and Investment Decisions
- 1 March 2005
- journal article
- Published by University of Chicago Press in The Journal of Business
- Vol. 78 (2) , 621-648
- https://doi.org/10.1086/427641
Abstract
The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that, when entrepreneurs rely on the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue sub-investment grade bonds instead and engage in second-best behavior. Credit derivatives can therefore cause disintermediation and thus reduce welfare. I argue that this effect can be most effectively countered by the introduction of reporting requirements for credit derivativesKeywords
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