Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform
Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2004 - Business & Economics - 34 pages
"We find that the risk-sensitivity of bank holding company subordinated debt spreads at issuance increased with regulatory reforms that were designed to reduce conjectural government guarantees, but declined somewhat with subsequent reforms that were aimed in part at reducing regulatory forbearance. In addition, we test and find evidence for a straightforward form of "market discipline:" The extent to which bond issuance penalizes relatively risky banks. Evidence for such discipline only appears in the periods after conjectural government guarantees were reduced"--Abstract.
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additional effects bank holding companies bank risk bank subordinated debt bank’s banking organization-speciﬁc risk beneﬁts Board of Governors bond issuance bond market Brian Sack call option ceteris paribus coupon frequency Covitz critical value debt market defacto TBTF default deposit insurance reforms deposit insurance regime distribution estimates are statistically Evidence Federal Reserve System Finance ﬁnancial ﬁnd ﬁnding ﬁrms Flannery and Sorescu government guarantees indicator that equals indicator variable Inﬂation inﬂuence instrument characteristics Interest Rates issuance decision model issuance spreads issue subordinated debt joint risk effect jointly equaling zero Liquidity market discipline Market Liquidity Monetary Policy OREO organization-speciﬁc risk proxies parameter estimates percent conﬁdence level post-FDICIA period purchase and assumption ratio reﬂect regulatory relatively risky banking risk premium risk-sensitivity of issuance sample selection model signiﬁcantly speciﬁcation statistically signiﬁcant subordinated debt investors subordinated debt issuance subordinated debt spreads traditional risk proxies Treasury Securities U.S. banking organizations Wald test statistic zero otherwise