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Tying Loan Interest Rates to Borrowers’ Credit Default Swap Spreads

Monday, February 10, 2014 7:03
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(Before It's News)

by Joao A. C. Santos – Liberty Street Economics, Federal Reserve Bank of New York

Banks’ practice of tying loan interest rates to borrowers’ credit default swap (CDS) spreads constitutes one of the most recent financial innovations. In this post, I discuss evidence from a research project, undertaken with Ivan Ivanov and Thu Vo, showing that this practice has lowered the cost of bank credit. I also discuss some potential drawbacks of this innovation.

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Source: http://econintersect.com/b2evolution/blog1.php/2014/02/10/tying-loan-interest-rates-to-borrowers-credit-default-swap-spreads

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