Market Discipline in Banking Reconsidered: The Roles of Funding Manager Decisions and Deposit Insurance Reform

59 Pages Posted: 17 Dec 2004

See all articles by Diana Hancock

Diana Hancock

Federal Reserve Board - Division of Research and Statistics

Myron L. Kwast

Federal Reserve Board - Division of Research & Statistics

Daniel M. Covitz

Federal Reserve Board - Division of Research & Statistics

Date Written: October 2004

Abstract

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

Hancock, Diana and Kwast, Myron L. and Covitz, Daniel M., Market Discipline in Banking Reconsidered: The Roles of Funding Manager Decisions and Deposit Insurance Reform (October 2004). FEDS Working Paper No. 2004-53. Available at SSRN: https://ssrn.com/abstract=633102 or http://dx.doi.org/10.2139/ssrn.633102

Diana Hancock (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3019 (Phone)
202-452-5295 (Fax)

Myron L. Kwast

Federal Reserve Board - Division of Research & Statistics

20th and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2909 (Phone)
202-452-3819 (Fax)

Daniel M. Covitz

Federal Reserve Board - Division of Research & Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States
202-452-5267 (Phone)
202-452-5295 (Fax)

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