Market Discipline in Banking Reconsidered: The Roles of Funding Manager Decisions and Deposit Insurance Reform
59 Pages Posted: 17 Dec 2004
Date Written: October 2004
We find that the risk-sensitivity of bank holding company subordinated debt spreads at issuance increased with regulatory reforms that were designed to reduce conjectural government guarantees, but declined somewhat with subsequent reforms that were aimed in part at reducing regulatory forbearance. In addition, we test and find evidence for a straightforward form of market discipline: The extent to which bond issuance penalizes relatively risky banks. Evidence for such discipline only appears in the periods after conjectural government guarantees were reduced.
Keywords: Debt issuance, subordinated bonds
JEL Classification: G21, G38
Suggested Citation: Suggested Citation