Determinants of Banks CDS Spreads and Policy Implications

Abstract

This paper analyzes the determinants of CDS spreads of major international

banks using the data period of 2005~2009, which includes

the global financial crisis. Taking into account that CDS spreads of

Korean banks, for example, rose sharply although they were financially

solid preceding the crisis period, we consider macroeconomic

variables that reflect the economic fundamentals and foreign liquidity

conditions of the economy, in addition to the financial indicators of

banks. Empirical results, based on a panel regression analysis of 40

major international banks, shows that macroeconomic variables such

as the fiscal balance, foreign reserves, foreign exposure, and financial

indicators such as banks capital, loan-to-asset ratio, and loan-todeposit

ratio matter significantly in determining banks CDS spreads.

The results also show that certain variables became significant during

the crisis period, which implies that it is important to manage and

monitor certain variables during such periods.