Ivan T. Ivanov

The Transformation of Banking: Tying Loan Interest Rates to Borrowers' CDS Spreads

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.

Are Concerns About Leveraged ETFs Overblown

The design of leveraged and inverse exchange-traded funds (ETFs) has raised concerns that they may exacerbate volatility in financial markets by mechanically rebalancing their portfolios in the same direction as contemporaneous returns. We show theoretically, however, that capital flows can lower ETF rebalancing demand and completely eliminate it in the limit. Empirically, we find that capital flows substantially reduce ETF rebalancing demand, even during periods of severe market stress. After accounting for capital flows and standard risk factors, we find that the impact of ETF rebalancing on late-day returns and volatility is economically insignificant.

Weathering Cash Flow Shocks

Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank-borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower-friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.

Claim Dilution in the Municipal Debt Market

U.S state and local governments are increasingly turning to bank financing amid deteriorating fiscal positions. We document that the maturity and collateral structure of municipal bank loans allows borrowers additional debt capacity by diluting outstanding long-term bonds. Specifically, most municipal bank borrowers obtain loans with shorter maturities than long-term outstanding bonds, also providing municipalities with significant interest cost savings. Last, we show that municipalities substantially increase bank borrowing and decrease municipal bonds issuance in response to exogenous adverse income shocks. This suggests the upward trend in bank borrowing will likely persist if fiscal positions continue to decline.

Strategic Response to Supervisory Coverage: Evidence from the Syndicated Loan Market

We use a reduction in the coverage of a federal supervisory program to identify whether and how banks adjust their syndicated lending in response to supervisory oversight. Using a difference-in-difference methodology, we find that syndicated deals that banks now find easier to exclude from the program are more likely to disappear than otherwise similar deals. Moreover, these effects are concentrated among deals held by domestic, larger, and more leveraged institutions, where incentives to strategically avoid scrutiny may be greater. As a result, surviving deals are of higher credit quality and therefore less likely to incur compliance costs from regulators. Overall, our findings are consistent with program compliance costs exceeding the private benefit of access to examiner expertise.

The Effect of Supervisory Loan Ratings on Syndicated Lending

We study the effect of bank supervision on borrower credit availability using a novel empirical approach. We vary the intensity of supervision at the loan-level by exploiting the assignment of federal examiners to syndicated loan reviews. Bank lenders decrease loan commitments in response to increased supervisory scrutiny, translating to lower credit availability and higher interest costs to borrowers. Borrowers only partially offset this loss in credit through non-bank financing. Small borrowers, without access to non-bank financing, experience even larger declines in credit. Finally, lead banks increase monitoring and adversely revise their internal risk estimates of borrowers subject to increased supervision.

Empirically Evaluating Systemic Risks in CCPs: The Case of Two CDS CCPs

Using a unique data set of weekly CDS positions of major CDS clearing dealers, we empirically evaluate the systemic stability of two CCPs that clear CDS contracts. Our methodology considers both micro- and macroprudential risks to the central clearing system. We show that individual clearing members may pose considerable risk to a CCP as losses of individual dealers in a stress scenario may be large. We show that the combined stress losses of a clearing member across multiple CCPs may be substantially larger than its losses to a single CCP due to a high and positive correlation in the economic exposures of the clearing member across CCPs. Last, we show that there is a potential for several clearing members to experience large losses simultaneously to a given CCP highlighting crowded trades concerns. The methodology explored in this paper documents the feasibility of performing integrated and coordinated stress testing of CCPs on an ongoing basis. These results suggest that the accumulation of systemic risk in the central clearing system may be non-trivial and that the proposed stress tests may be a useful tool for measuring and managing such risk.