Funding Advantage and Market Discipline in the Canadian Banking Sector

47 Pages Posted: 8 Sep 2013 Last revised: 7 Nov 2014

See all articles by Mehdi Beyhaghi

Mehdi Beyhaghi

Federal Reserve Banks - Federal Reserve Bank of Richmond

Chris D'Souza

Bank of Canada

Gordon S. Roberts

York University - Schulich School of Business

Date Written: July 16, 2013

Abstract

We employ a comprehensive data set and a variety of methods to provide evidence on the magnitude of large banks’ funding advantage in Canada in addition to the extent to which market discipline exists across different securities issued by the Canadian banks. The banking sector in Canada provides a unique setting in which to examine market discipline along with the prospects of proposed reforms because Canada has no history of government bailouts, and an implicit government guarantee has been in effect consistently since the 1920s. We find that large banks have a funding advantage over small banks after controlling for bank-specific and market risk factors. Large banks on average pay 80 basis points and 70 basis points less, respectively, on their deposits and subordinated debt. Working with hand-collected market data on debt issues by large banks, we also find that market discipline exists for subordinated debt and not for senior debt.

Keywords: Bail-in, Contingent Capital, Market Discipline, Funding Advantage, Subordinated Debt, Financial Regulation, Bank Resolution, Cost of Debt

JEL Classification: G01, G21, G28, G32, G33

Suggested Citation

Beyhaghi, Mehdi and D'Souza, Chris and Roberts, Gordon S., Funding Advantage and Market Discipline in the Canadian Banking Sector (July 16, 2013). Journal of Banking and Finance, Vol. 48, 2014. Available at SSRN: https://ssrn.com/abstract=2321878 or http://dx.doi.org/10.2139/ssrn.2321878

Mehdi Beyhaghi (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Chris D'Souza

Bank of Canada ( email )

234 Wellington Street
Ontario, Ontario K1A 0G9
Canada

Gordon S. Roberts

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 x77953 (Phone)
416-736-5687 (Fax)

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