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A reconsideration of the risk sensitivity of U.S. banking organization subordinated debt spreads: a sample selection approach

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  • Daniel M. Covitz
  • Diana Hancock
  • Myron L. Kwast
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    Abstract

    The authors estimate a sample selection model over three distinct regulatory "regimes" when the treatment of bank bondholders (in the event of bank failures) differed substantially. They then estimate their selection model to test the strength of bond market discipline over these three regulatory regimes, finding that bank bond spreads are positively associated with bank risk measures during all three regimes, even during the too-big-to-fail period.

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    File URL: http://www.newyorkfed.org/research/epr/04v10n2/0409Covi.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

    Volume (Year): (2004)
    Issue (Month): Sep ()
    Pages: 73-92

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    Handle: RePEc:fip:fednep:y:2004:i:sep:p:73-92:n:v.10no.2

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    Related research

    Keywords: Bank assets ; Debt management ; Banks and banking - Ratio analysis ; Deposit insurance;

    References

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    Citations

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    Cited by:
    1. Chen , Yehning & Hasan, Iftekhar, 2011. "Subordinated debt, market discipline, and bank risk," Research Discussion Papers 20/2011, Bank of Finland.
    2. Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011. "Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform," Journal of Economics and Business, Elsevier, vol. 63(1), pages 1-22, January.
    3. Jérôme Coffinet & Adrian Pop & Muriel Tiesset, 2013. "Monitoring Financial Distress in a High-Stress Financial World: The Role of Option Prices as Bank Risk Metrics," Journal of Financial Services Research, Springer, vol. 44(3), pages 229-257, December.
    4. Konstantinos Drakos, 2012. "US banks' capitalization speed-of-adjustment: a microeconometric approach," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(3), pages 270-286, August.
    5. Beverly Hirtle, 2007. "Public disclosure, risk, and performance at bank holding companies," Staff Reports 293, Federal Reserve Bank of New York.
    6. Balasubramnian, Bhanu & Cyree, Ken B., 2014. "Has market discipline on banks improved after the Dodd–Frank Act?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 155-166.
    7. Pop, Adrian, 2006. "Market discipline in international banking regulation: Keeping the playing field level," Journal of Financial Stability, Elsevier, vol. 2(3), pages 286-310, October.
    8. ap Gwilym, Rhys & Kanas, Angelos & Molyneux, Philip, 2013. "U.S. prompt corrective action and bank risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 239-257.
    9. Naohiko Baba & Masakazu Inada, 2007. "Price Discovery of Credit Spreads for Japanese Mega-Banks: Subordinated Bond and CDS," IMES Discussion Paper Series 07-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    10. Niu, Jijun, 2008. "Can subordinated debt constrain banks' risk taking?," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1110-1119, June.
    11. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform," Finance and Economics Discussion Series 2004-53, Board of Governors of the Federal Reserve System (U.S.).
    12. Forssbæck, Jens, 2011. "Ownership structure, market discipline, and banks' risk-taking incentives under deposit insurance," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2666-2678, October.
    13. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July.
    14. Philip Bond & Itay Goldstein & Edward S. Prescott, 2006. "Market-based regulation and the informational content of prices," Working Paper 06-12, Federal Reserve Bank of Richmond.
    15. Baba, Naohiko & Inada, Masakazu, 2009. "Why do Japanese regional banks issue subordinated debts?," Japan and the World Economy, Elsevier, vol. 21(4), pages 358-364, December.
    16. Donald P. Morgan & Kevin J. Stiroh, 2005. "Too big to fail after all these years," Staff Reports 220, Federal Reserve Bank of New York.

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