Title: The implications of credit risk transfer for the credit channel
Author: Mari L. Robertson
Address: Department of Economics, Carl H. Lindner College of Business, University of Cincinnati, P.O. Box 210371, Cincinnati, OH 45221-0371, USA
Abstract: Growth in new instruments designed to trade credit risk has significant implications for the conduct of monetary policy through banks. This paper considers the effects of three credit risk transfer instruments - securitised assets, secondary market syndicated loans, and credit derivatives - on the credit channel of the transmission mechanism. With alternative funding opportunities, a new theoretical framework focuses on the ability of monetary policy to impact the financial condition of banks as borrowers in credit markets. Evidence of the credit channel is tested for in a factor-augmented vector autoregression (FAVAR) model. The results show no support for the existence of a traditional bank lending channel that functions through deposits and the supply of bank credit but demonstrate credit channel effects in higher bank funding costs, which are passed on to bank business loan and nonbank commercial mortgage borrowers. The results suggest that credit risk transfer has transformed some credit markets so that monetary policy remains effective through the cost of credit.
Keywords: credit risk transfer; credit channel; risk taking channel; monetary policy; FAVAR model; trade credit risk; banks.
Int. J. of Monetary Economics and Finance, 2013 Vol.6, No.4, pp.325 - 367
Submission date: 13 Oct 2013
Date of acceptance: 25 Jan 2014
Available online: 21 Mar 2014