Credit Protection and Lending Relationships

  title={Credit Protection and Lending Relationships},
  author={Stefan Arping},
  • Stefan Arping
  • Published 2012
We examine the impact of CDS protection on lending relationships and efficiency. CDS insulate lenders against losses from forcing borrowers into default and liquidation. This improves the credibility of foreclosure threats, which can have positive implications for borrower incentives and credit availability ex ante. However, lenders may also abuse their enhanced bargaining power vis–à–vis borrowers and extract additional surplus in debt renegotiations. If this hold up threat becomes severe… CONTINUE READING
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