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Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform

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

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2004-53.

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    Date of creation: 2004
    Date of revision:
    Handle: RePEc:fip:fedgfe:2004-53

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    Keywords: Banks and banking ; Risk management ; Deposit insurance;

    References

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    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.:
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    1. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "A reconsideration of the risk sensitivity of U.S. banking organization subordinated debt spreads: a sample selection approach," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 73-92.
    2. Urs W. Birchler & Diana Hancock, 2003. "What does the yield on subordinated bank debt measure?," Finance and Economics Discussion Series 2004-19, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Naohiko Baba & Masakazu Inada & Yasuo Maeda, 2007. "Determinants of Subordinated Debt Issuance by Japanese Regional Banks," IMES Discussion Paper Series 07-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
    2. 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.
    3. repec:hal:wpaper:hal-00574161 is not listed on IDEAS
    4. Saoussen Ben Gamra, 2009. "Marchés obligataires et stabilité financière: L'expérience asiatique," CEPN Working Papers hal-00574161, HAL.
    5. Yehning Chen & Iftekhar Hasan, 2011. "Subordinated Debt, Market Discipline, and Bank Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1043-1072, 09.

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