N°23-102: CDS and Credit: The Effect of the Bangs on Credit Insurance, Lending and Hedging

We assess the differential impact of the “Big Bang” and “Small Bang” contract and convention changes on market participants across CDS markets. We couple comprehensive bank-firm level CDS trading data from DTCC to the German credit register containing bilateral bank-firm credit exposures. We find that after the Bangs, the cost of buying CDS contracts becomes lower for non dealer banks, and that – because of this decrease in insurance cost – these banks extend relatively more credit to CDS traded and affected firms compared to dealers, and hedge more effectively. Hence, standardization lowers the cost of credit insurance and increases credit availability.