The Effects Of Credit Derivatives On U.S. Bank Risk And Return, Capital And Lending Structure

The authors examine the effects of credit derivatives on BHC risk and return by separating users of credit derivatives into three categories: Protection buyers, protection sellers, and active users (market makers). Protection buyers use credit derivatives to decrease their total risk, and they simultaneously increase capital and shift their loan portfolio into riskier loan types. Protection sellers increase total risk, but appear to be compensated with higher returns. Active users see little change in risk or return. Overall, the evidence suggests that BHCs use credit derivatives as increasingly important instruments to execute effectively their overall risk and return strategies.