This suggests that derivatives help banks to shield themselves (at least partially) from a monetary policy shock. However, credit protection through credit derivatives may also be associated with an increase in bank credit supply, as has been found for other innovations like securitizations as well.
Drawing on US micro data Hirtle (2007) finds that greater use of credit derivatives is associated with greater supply of bank credit for large term loans. Further, huge amounts of loan-backed instruments have been acquired by entities known as conduits/SIVs which, while not appearing in banks’ balance sheets, benefit from large contingent credit lines granted by banks that set them up.