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

47 Pages Posted: 24 Jun 2012

See all articles by Bhanu Balasubramanian

Bhanu Balasubramanian

Western Michigan University - Department of Finance and Commercial Law

Ken B. Cyree

University of Mississippi - School of Business Administration

Date Written: June 8, 2012

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.

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

JEL Classification: G01, G20, G21, G28

Suggested Citation

Balasubramanian, Bhanu and Cyree, Ken B., Has Market Discipline on Banks Improved after the Dodd - Frank Act? (June 8, 2012). Available at SSRN: https://ssrn.com/abstract=2089745 or http://dx.doi.org/10.2139/ssrn.2089745

Bhanu Balasubramanian (Contact Author)

Western Michigan University - Department of Finance and Commercial Law ( email )

Kalamazoo, MI 49007
United States

Ken B. Cyree

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

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