Market Discipline of Canadian Banks’ Letters of Credit Activities: An Empirical Examination

The Service Industries Journal, Issue 22.4, 2002, 187-208

Posted: 16 Mar 2015

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Van Son Lai

Université Laval

Min-Teh Yu

National Chiao Tung University

Date Written: 2002

Abstract

While the motivation and riskiness of US off-balance sheet banking activities have been studied both theoretically and empirically, no such study has been found dealing with Canadian off-balance sheet banking activities, although such activities are numerically huge, and growing larger each year.

This article provides support for a market discipline hypothesis of Canadian bank letters of credit activities by employing several market measures of risk from one-factor and multi-factor models, and an implied asset volatility from the option-pricing model. Furthermore, it examines both price and quantity response of off-balance sheet activities in the Canadian banking market by employing a Tobit analysis to assess the robustness of our conclusions about market discipline. The results indicate that various market measures of risk and letters of credit are negatively related. Moreover, banks with greater portfolio risk measured in terms of equity and asset risk, high leverage and interest rate risk are less likely to issue letters of credit.

Suggested Citation

Hassan, M. Kabir and Lai, Van Son and Yu, Min-Teh, Market Discipline of Canadian Banks’ Letters of Credit Activities: An Empirical Examination (2002). The Service Industries Journal, Issue 22.4, 2002, 187-208, Available at SSRN: https://ssrn.com/abstract=2578424

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Van Son Lai (Contact Author)

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

Min-Teh Yu

National Chiao Tung University ( email )

1001 University Road
East District
Hsinchu, 300
Taiwan
886-988320388 (Phone)

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