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Forbearance, subordinated debt, and the cost of capital for insured depository institutions

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Author Info
William P. Osterberg
James B. Thomson

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Abstract

Using an explicit model for subordinated debt that considers the possibility of FDIC forbearances, the authors show that forbearance 1) alters the required rate of return on subordinated debt while increasing its market value and 2) weakens the effectiveness of such debt as a source of market discipline.

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File URL: http://clevelandfed.org/Research/Review/1992/92-q3-osterberg.pdf
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Publisher Info
Article provided by Federal Reserve Bank of Cleveland in its journal Economic Review.

Volume (Year): (1992)
Issue (Month): Q III ()
Pages: 16-26
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Handle: RePEc:fip:fedcer:y:1992:i:qiii:p:16-26:n:v.28no.3

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Related research
Keywords: Bank capital ; Deposit insurance;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Herbert Baer, 1985. "Private prices, public insurance: The pricing of federal deposit insurance," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 45-57. [Downloadable!]
  2. Richard E. Randall, 1989. "Can the market evaluate asset quality exposure in banks?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 3-24.
  3. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March. [Downloadable!] (restricted)
  4. Gorton, Gary & Santomero, Anthony M, 1990. "Market Discipline and Bank Subordinated Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 119-28, February. [Downloadable!] (restricted)
  5. James B. Thomson, 1987. "FSLIC forbearances to stockholders and the value of savings and loan shares," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 26-35. [Downloadable!]
  6. Chen, Andrew H, 1978. "Recent Developments in the Cost of Debt Capital," Journal of Finance, American Finance Association, vol. 33(3), pages 863-77, June. [Downloadable!] (restricted)
  7. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June. [Downloadable!] (restricted)
  8. Avery, Robert B & Belton, Terrence M & Goldberg, Michael A, 1988. "Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 597-610, November. [Downloadable!] (restricted)
  9. Mark J. Flannery, 1989. "Pricing deposit insurance when the insurer measures risk with error," Proceedings, Federal Reserve Bank of Chicago, pages 70-100.
  10. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-11, May. [Downloadable!] (restricted)
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