Finance and Economics Discussion Series (FEDS)

Twitter Share RSS

September 2014

Tying loan interest rates to borrowers' CDS spreads

Ivan T. Ivanov, Joao A. C. Santos, and Thu Vo

Abstract:

We investigate how the introduction of market-based pricing, the practice of tying loan interest rates to credit default swaps, has affected borrowing costs. We find that CDS-based loans are associated with lower interest rates, both at origination and during the life of the loan. Our results also indicate that banks simplify the covenant structure of market-based pricing loans, suggesting that the decline in the cost of bank debt is explained, at least in part, by a reduction in monitoring costs. Market-based pricing, therefore, besides reducing the cost of bank debt, may also have adverse consequences resulting from the decline in bank monitoring.

Accessible version (.zip)

Keywords: Market-based pricing, loan spreads, loan covenants, CDS spreads

PDF: Full Paper

Back to Top
Last Update: June 26, 2020