Nº 20-15: Identifying Empty Creditors with a Shock and Microdata

Credit default swaps on firm debt enable creditors to hedge against default, disincentivizing them to participate in firm restructuring. This "empty creditor" effect was neutralized by a change in the bankruptcy code in 2012 in Germany, a country with microdata matching bank-firm CDS net notional with credit exposures. After the change the probability of default of CDS firms declines, more when creditors are more hedged or debt is concentrated, less when credit relationships are longer, debt more collateralized, or firms financially safer. Recognition of change is stronger for capital unconstrained, liquidity constrained banks that monitor less or earn less interest.