In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signalling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signalling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets.

Credit Derivatives: Capital Requirements and Opaque OTC Markets

PELIZZON, Loriana
2008-01-01

Abstract

In this paper we study the optimal design of credit derivative contracts when banks have private information about their ability in the loan market and are subject to capital requirements. First, we prove that when banks are subject to a maximum loss capital requirement the optimal signalling contract is a binary credit default basket. Second, we show that if credit derivative markets are opaque then banks cannot commit to terminal-date risk exposure, and therefore the optimal signalling contract is more costly. The above results allow us to discuss the potential implications of different capital adequacy rules for the credit derivative markets.
2008
17
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/29131
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