Has Market Discipline on Banks Improved after the Dodd - Frank Act?

Abstract:     
We investigate whether or not market discipline on banking firms changed after the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) of 2010. If market discipline is improved, we should see a lower discount for size on yield spreads, particularly for larger banks. Using secondary market subordinated debt transactions we find that the DFA has been effective in reducing, but not in eliminating the too-big-to-fail (TBTF) effect on yield spreads. We find that the yield spread for the 19 TBTF banks increased by 155 basis points, but these banks still have yield spreads 61 basis points lower than a non-TBTF bank.

Number of Pages in PDF File: 47

Keywords: Dodd - Frank Act, market discipline, default risk, yield spread, financial crisis

JEL Classification: G01, G20, G21, G28

working papers series