ریسک و مصون سازی: آیا مشتقات اعتباری ریسک بانکی را افزایش می دهد؟

The objective of this paper is to investigate whether financial innovation of credit derivatives makes banks more exposed to credit risk. Although credit derivatives are important for hedging and securitizing credit risk – and thereby likely to enhance the sharing of such risk – some commentators have raised concerns that they may destabilize the banking sector. This paper investigates this issue in a simple model driven by costs of financial distress. The analysis identifies two effects of credit derivatives innovation – they enhance risk sharing as suggested by the hedging argument – but they also make further acquisition of risk more attractive. The latter effect, if dominant, can therefore destabilize the banking sector. The critical factor is, perhaps surprisingly, the competitive nature of the existing underlying credit markets. As these markets become more elastic the threat of destabilization increases. The paper discusses issues related to bank regulation within the context of the model.

The paper addresses the question whether financial innovation of credit derivatives and the resulting derivatives trading make banks riskier. Banks have recently gained access to a relatively new and rich class of securities – credit derivatives – which have become actively traded. The scope for transferring risk in the banking sector has as a result increased considerably. As Altman et al. (1998) observe “banks no longer simply want to make loans (buy) and hold them either to maturity or charge-off, … [they] are increasingly willing to consider transacting their assets in counter party arrangements whereby the credit-risk exposure is shifted with the reduction in total risk of the original lender.” It would be easy to assert, therefore, that the supply of derivatives essentially reduces bank risk. Rule (2001) argues, for instance, that the “[d]evelopment of [the credit derivatives] markets has clear potential benefits for financial stability because they allow the origination and funding of credit to be separated from the efficient allocation of the resulting credit risk.” Recently, however, the Bank of England voiced concerns that the growth in credit derivative securities is a potential threat to bank stability. There is, therefore, a genuine debate about the effect that access to hedge instrument has on risk acquisition. The theoretical literature in this field is nonetheless somewhat limited. The bank risk literature has predominantly been occupied with the issue of risk measurement, and perhaps rightly so. A major problem for bank regulators is simply assessing the given risk exposure of the bank, and although standards have emerged it is clear that there is a long way to go. Additionally, banks' internal risk measurement technology is by no means perfect, as Berkowitz and O'Brien (2002) point out. The line of attack in this paper, in contrast, is to identify the factors that make a bank inclined to increase its exposure to perceived risk regardless of how well it can be measured. This should not be taken to imply that risk measurement is unimportant. That risk measuring technology is imperfect is in our opinion a prime motivator for understanding the factors that drive risk taking behaviour. A better understanding of these factors is perhaps needed more when our ability to measure risk is impaired. This paper assesses also, therefore, potential ways of controlling risk acquisition in banks by directly affecting the bank's incentives to expose itself to risk. It is clear that credit derivatives trading can be socially beneficial or harmful in a systemic sector such as the banking sector (for a survey on systemic risk, see e.g., Dow (2000) and references therein). In perfect markets we expect nonetheless the trading of derivative instruments to be of insignificant importance to the firms' value maximization problem. An extra ingredient is needed, therefore, to link the private motivation to acquire risk with the potential social costs of destabilization. In this paper, this extra ingredient is the deadweight costs of financial distress coupled with a rigid balance sheet. Although financial distress costs are not necessarily the whole story, they are certainly not implausible as both theoretical (see e.g., Giammarino, 1989) and numerous empirical studies argue. The costs of distress and the rigidity of their balance sheets induce banks to actively manage their risk exposures (in this case by credit derivatives trading) and incorporate risk management as an integral part of the activities that generate shareholder value. To an extent this is supported by casual empirical evidence. For instance, the BBA surveys (1999/2000 and 2001/2002) show that a number of banks in the London market argue that credit derivatives trading is more important in reference to active portfolio/asset management than in reference to compliance with regulation. That banks emphasize the economic importance of these securities is, therefore, significant. The main contribution of the paper is to provide a theoretical framework in which to identify potential destabilizing factors for the banking sector and to discuss regulatory responses to mitigate destabilization of this sector. The key insight identified in this paper is that when the bank has access to a richer set of derivatives to manage risk than before, it also plays the risk acquisition game more aggressively. Risk exposures become, in effect, more attractive when they can more easily be offloaded through derivatives trading. The crucial question is how much of the extra risk will be transferred to outside parties and how much remains with the bank. The answer to this question depends on a single factor, the price elasticity of the underlying credit markets. If too elastic, banks operate too aggressively in the underlying credit markets following a derivatives innovation so as to threaten bank stability. If too inelastic there is an opposite effect and the banking sector is stabilized by the development of the credit derivatives market. How well do the results square with the empirical evidence? There is to our knowledge very little work done to link the financial innovation and trading of derivatives to the characteristics of the underlying credit risks. Our story is very simple. In a segmented market place we should expect financial innovation to be concentrated to the more elastic segments, and the banks operating in these segments to be more aggressive risk takers than those operating in the less elastic segments. Although there is a lack of systematic empirical research on this issue there is nonetheless some casual evidence that seems to support our story. Looking at the users of credit derivatives one could argue that the banks most likely to access elastic credit markets are the global banks, and these banks are also the most active players in the credit derivatives markets (Rule, 2001). Moreover, one could argue that the credit markets that are global (e.g., sovereign debt) or based on a broad composite of credit events (e.g., a portfolio of corporate bonds) should be more elastic than those that are linked to single firm credit events (e.g., a ratings downgrade for a specific corporate bond). The trading of derivatives that depend on the first type of risk is, therefore, likely to be more harmful to bank risk than the trading of derivatives that depend on the second type of risk. Conversely, the innovation of derivatives that are linked to the first type of risk is likely to be more profitable to the innovator than those that are linked to the second type of risk. The BBA (1999/2000 and 2001/2002) reports shows that sovereign assets have had a relatively dominant position as the underlying asset for derivatives, but that its position is decreasing from 35% in 1997 to a projected 17% by the end of 2004. Corporate assets, which has the most dominant position as underlying, has strengthened its position from 35% in 1997 to a projected 59% by the end of 2004. Interestingly, the report highlights the rapid increase in portfolio products and CLOs (Credit-linked Obligations) among these assets, which accounts for a projected 26% of products by the end of 2004. The increasing popularity of portfolio products and CLOs (in particular, credit portfolio securitization) contributes strongly both for the decline in sovereign assets and the consolidation of the position of the corporate assets. There is, therefore, at least some indication that innovation of credit derivatives are drawn towards increasingly elastic segments of the credit market and that these products in turn are becoming increasingly popular tools for managing credit risk. The first strand of related literature investigates the effects of the lender–borrower relationship when loans can be hedged in the credit derivatives market, see Duffee and Zhou (2001) and Morrison (2001). Duffee and Zhou (2001) and Morrison (2001) argue both that although credit derivatives create a way of protecting lenders from adverse selection costs ex post, they also can prevent efficient lending ex ante. A second strand analyzes and assesses methods for market and credit risk measurement. Among many contributions we find Duffie and Pan (1997) and Jackson et al. (1997). A third strand deals with financial innovation, which is essentially exogenous in our model but nonetheless an important ingredient. This literature is surveyed in some detail in Allen and Gale (1994) and Duffie and Rahi (1995). A final strand relates to assessing and controlling the risk acquisition policy of the bank by an outside regulator. Important contributors on bank regulation are Dewatripont and Tirole (1994) and the further surveys in Freixas and Rochet (1998). Additionally, there is a number of reports from the Basel Committee's work on bank supervision guidelines. The paper proceeds as follows: Section 1 outlines the model. Section 2 derives the optimal lending and hedging policy for the bank. Section 3 discusses issues related to bank regulation. Section 4 concludes.

Has the development of the market for credit derivative securities a destabilizing effect on the banking sector? The key finding is that a financial innovation in the credit derivatives market may increase bank risk, particularly those that operate in highly elastic credit market segments. Credit derivatives trading is, therefore, a potential threat to bank stability even if banks use these instruments solely to hedge or securitize their credit exposures. The paper discusses the regulatory response to this finding. Of crucial importance is the financial innovation process. Arguably, the success of a new credit derivative instrument is determined by its commercial success, i.e., how aggressively it will be traded. Since the credit risk linked to the elastic segments of the credit markets leads to more aggressive credit derivatives trading the direction of the financial innovation process is potentially also a threat to bank stability. The innovations that yield the most commercial success are precisely those that yield the minimum impact in terms of welfare. It is, therefore, a relevant question whether direct regulation of the credit market is warranted.