This dissertation investigates the relationship between credit derivatives and bank portfolio performance at the bank holding company (BHC) level; it examines the moral hazard problem caused by BHCs' use of credit derivatives as a risk management tool. With the major changes in industry regulation in the last two decades, the United States banking system has begun to take on a new look. During this period, the number of banks has declined; however, there has been significant growth in qmega banks, q which include the large BHCs. While diversification (geographic and asset) can reduce risk, it can create challenges for uniformity in decision making across operations. Additionally, larger investments in the organizational structure are expected to lead to larger operational expenses which could, in turn, suggest a greater incentive for banks to speculate with off-balance-sheet hedges to offset shrinking margins. The growth of the global credit derivatives market has surpassed previous expectations, outstripping industry predictions of $5.021 trillion and $8.206 trillion by the end of 2004 and 2006, respectively (BBA, 2004). The global credit derivatives market is expected to reach $33.12 trillion by the end of 2008 (BBA, 2006). Banks have found credit derivative transactions to be more efficient than traditional securitizations in reducing their exposure to corporate credits, and they have been the dominant participants in the credit derivatives market. BHCs that are implementing derivatives for risk management purposes represent the larger banks, and they generally operate under a different philosophy, one of low cost/high volume, unlike high cost/low volume approaches of the smaller banks. Considering the rapid growth in the use of credit derivatives, it is important to identify how bank-specific traits, such as size, are factors in their use and performance. In light of the role of financial institutions in the stability of the economy, it is particularly important to look at the larger banks that are using credit derivatives. This research tested empirically, whether BHCs realize better risk-return tradeoffs by using credit derivatives, and found that while using credit derivatives did not affect BHC return or performance, BHCs that bought credit derivatives had higher net loan charge-offs.This lending coupled with the ex-ante credit risk exposure presents a real risk for economic instability. ... The primary objective of this research was therefore to examine the effectiveness of credit derivatives as a risk management tool, while a anbsp;...
|Title||:||The Effectiveness of Credit Derivatives on Bank Portfolio Management for Bank Holding Companies|
|Publisher||:||ProQuest - 2007|