Deposit Insurance, Market Discipline and Off-Balance Sheet Banking Risk of Large U.S. Commercial Banks
Department of Economics and Finance Working Papers, 1991-2006, Paper 52
35 Pages Posted: 1 Nov 2018
Date Written: 1991
The "market discipline" of off-balance sheet banking activities (OBSA) has been reexamined by employing contingent claims valuation techniques to derive implied asset variances from bank equity and deposit insurance, and from risk-premia for bank subordinated debt. Specifically implied asset variances have been calculated from contingent valuation models and have been regressed over on-balance accounting risk variables and off-balance sheet activities. These implied asset variances are better than equity variance or risk-premia in proxying total risk because they consider both the non-linear nature of contingent claims model and the impact of closure rules. Empirical results document the existence of "market discipline" of some OBSA. Market participants price these OBSA as risk-reducing. Therefore, regulatory additional capital requirements of such OBS may be inappropriate.
Keywords: Market Discipline, Off-Balance Sheet, OBSA, Contingent Claims, Valuation, Implied Asset Variance
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