CDS and credit: The effect of the bangs on credit insurance, lending and hedging

• We assess the impacts of “Big Bang” and “Small Bang” across CDS markets. • We couple bank-firm-level CDS trading data to the German credit register. • After the Bangs, buying CDS contracts becomes cheaper for non-dealer banks. • Non-dealer banks extend relatively more credit to CDS-traded and affected firms. • Standardization lowers the cost of insurance increasing credit by non-dealer banks. We assess the differential impacts of “Big Bang” and “Small Bang” contracts and convention changes on market participants across CDS markets and couple comprehensive bank-firm-level CDS trading data from the DTCC to the German credit register containing bi-lateral bank-firm credit exposures. We find that after the Bangs, the cost of buying CDS contracts becomes lower for non-dealer banks and that, because of this decrease in insurance costs, these banks extend relatively more credit to CDS-traded and affected firms compared to dealers, and hedge more effectively. Hence, standardization lowers the cost of credit insurance and leads to a relative increase in credit extensions by non-dealer banks.