Credit Risk Transfer Practices in US Commercial

Building on the main theoretical motivations for credit risk transfer (CRT), we compare, from an empirical perspective, the use of loan sales, securitization and credit derivatives for a sample of US commercial banks over the period 2001- 2008. First, we investigate how intensively different CRT instruments have been used in practice. Second, we analyze whether certain bank characteristics can be associated with a preference expressed by the institution for a specific tool over the others. In line with the prevailing theoretical predictions, the main features considered are: bank capitalization and liquidity; bank size and reputation; business model; loan portfolio composition; loan portfolio quality; profitability. Using both univariate analysis and panel econometric tools, we attempt to identify which of the above elements are more closely related to the use of loan sales / securitization and credit derivatives. We find that the main theoretical predictions are generally fulfilled: banks with riskier loan portfolios, liquidity constraints and higher asymmetric information issues prefer to use traditional CRT tools, while large and well capitalized banks with less risky portfolios resort to credit derivatives when experiencing capital shocks