The CDS-Loan Basis Across Firms and the Business Cycle

Abstract

We analyze the difference between credit default swap (CDS) and syndicated loan spreads, defined as the “CDS-loan basis”. Our results indicate that the CDS-loan basis is greater when the cost of information asymmetry is higher, such as for riskier borrowers and in economic downturns. Our findings suggest that loan spreads applied to riskier borrowers are less correlated with the business cycle than CDS spreads. Overall, our analysis is consistent with the hypothesis that, at least in part, banks still play a special role in the current financial system compared with other investors.