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

Posted: 1 Apr 2013

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 26, 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. Interestingly, we find a negative and significant 2-day abnormal stock return of -1.53% around FDIC-backed debt issue dates, suggesting stockholders held pessimistic views on the future prospects of these banks. Bondholders reacted positively to the issuances with a 2-day excess return of 0.32%, confirming the positive liquidity and credit effects in the debt market.

We find a significant drop in yield spreads of AAA debt issues around the announcements of FDIC guarantee debt issues. 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. Finally, FDIC backed debt trades at a discount of 132 bps to non-guaranteed debt, implying that the guarantee is valuable.

Keywords: FDIC, Temporary Liquidity Guarantee, Financial Crisis, Fixed Income

JEL Classification: G21, G28

Suggested Citation

Ambrose, Brent W. and Cheng, Yiying and King, Tao-Hsien Dolly, Financial Crisis, Temporary Liquidity Guarantee Program, and the Impacts on the Fixed Income Markets (March 26, 2013). Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: https://ssrn.com/abstract=2240018 or http://dx.doi.org/10.2139/ssrn.2240018

Brent W. Ambrose

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 (Contact Author)

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)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
581
PlumX Metrics