Financial Crisis, Temporary Liquidity Guarantee Program, and Impacts on the Fixed Income Markets

Posted: 14 Aug 2012 Last revised: 27 Jun 2014

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

Yiying Cheng

University of St Thomas

Tao-Hsien Dolly King

University of North Carolina (UNC) at Charlotte - Department of Finance

Date Written: March 1, 2013

Abstract

In this paper, we study the FDIC’s Temporary Liquidity Guarantee Program to examine the effectiveness of this government sponsored solution to the current banking crisis. We explore the impact of the program on the liquidity and credit crisis in the debt markets and the market value of the FDIC guarantee. We find a significant reduction in yield of AAA debt issues around the announcements of FDIC guarantee debt issues. In addition, using multiple regressions we confirm the drop in yield spreads of AAA financial bonds after the program started. Both findings suggest that the program effectively encouraged liquidity and confidence. We also find the FDIC guarantee valuable especially when we compare with the non-FDIC-backed debt issued by non-FDIC issuers. Interestingly, we find a negative and significant cumulative abnormal stock return around FDIC-backed debt issue dates, suggesting stockholders held pessimistic views on the future prospects of these banks. On the other hand, bondholders reacted positively to the issuances, confirming the positive liquidity and credit effects in the debt market.

Suggested Citation

Ambrose, Brent W. and Cheng, Yiying and King, Tao-Hsien Dolly, Financial Crisis, Temporary Liquidity Guarantee Program, and Impacts on the Fixed Income Markets (March 1, 2013). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2129405 or http://dx.doi.org/10.2139/ssrn.2129405

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Yiying Cheng

University of St Thomas ( email )

713-525-2108 (Phone)

Tao-Hsien Dolly King

University of North Carolina (UNC) at Charlotte - Department of Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7652 (Phone)
704-687-6987 (Fax)

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