Division Of Labor In Banking: An Analysis Of Credit Derivative Usage By Commercial Banks

Abstract

For the period 2002-2005, we examine a sample of 131 end-of-year observations for 57 banks that participate in the credit derivatives market. We find that buyers of credit protection tend to be loan sellers and may have a comparative advantage in loan origination, while credit protection sellers tend to be loan buyers and may have a comparative advantage in funding loans. Furthermore, some net credit protection buyers may derive an advantage as loan originators from a high-quality reputation, while others seem to be better able to break down informational barriers due to their position as market makers in credit derivatives.