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Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously

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  • Adrian Pop

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)

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    Abstract

    The logic behind the indirect channel of market discipline presumes that the pricing of bank debt in the secondary market, if accurate, conveys to supervisor and other market participants a reliable signal of bank's financial conditions and default risk. By collecting a unique dataset of spreads, ratings, and accounting measures of bank risk for a sample of large European banking organizations during the 1995—2002 period, we empirically test whether secondary market prices accurately reflect financial conditions of bank issuers. Our results complement the findings obtained by Sironi [Testing for market discipline in the European banking industry: Evidence from subordinated debt issues. Journal of Money, Credit, and Banking 35 (2003) 443-472] on the primary market of bank subordinated debt

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    Paper provided by HAL in its series Working Papers with number hal-00419241.

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    Date of creation: 23 Sep 2009
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    Handle: RePEc:hal:wpaper:hal-00419241

    Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00419241/en/
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    1. Douglas D. Evanoff & Larry D. Wall, 2001. "Sub-debt yield spreads as bank risk measures," Working Paper 2001-11, Federal Reserve Bank of Atlanta.
    2. Urs W. Birchler & Matteo Facchinetti, 2006. "Can bank supervisors rely on market data? A critical assessment from a Swiss perspective," Working Papers 2006-08, Swiss National Bank.
    3. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October.
    4. Joa˜o A.C. Santos, 2009. "Do markets “discipline” all banks equally?," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 1(1), pages 107-123, April.
    5. Andrea Sironi, 2000. "An analysis of European banks SND issues and its implications for the design of a mandatory subordinated debt policy," Finance and Economics Discussion Series 2000-41, Board of Governors of the Federal Reserve System (U.S.).
    6. Charles W. Calomiris, 2006. "The Regulatory Record of the Greenspan Fed," American Economic Review, American Economic Association, vol. 96(2), pages 170-173, May.
    7. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt and bank capital reform," Working Paper 2000-24, Federal Reserve Bank of Atlanta.
    8. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2002. "Equity and bond market signals as leading indicators of bank fragility," Working Paper Series 0150, European Central Bank.
    9. C. N. V. Krishnan & Peter H. Ritchken & James B. Thomson, 2003. "On credit spread slopes and predicting bank risk," Working Paper 0314, Federal Reserve Bank of Cleveland.
    10. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
    11. Douglas D. Evanoff & Larry D. Wall, 2001. "Measures of the riskiness of banking organizations: Subordinated debt yields, risk-based capital, and examination ratings," Working Paper 2001-25, Federal Reserve Bank of Atlanta.
    12. 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.
    13. Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.).
    14. Douglas Evanoff & Julapa Jagtiani & Taisuke Nakata, 2007. "The potential role of subordinated debt programs in enhancing market discipline in banking," Research Working Paper RWP 07-07, Federal Reserve Bank of Kansas City.
    15. Santos, Joao A.C., 2006. "Why firm access to the bond market differs over the business cycle: A theory and some evidence," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2715-2736, October.
    16. C. N. V. Krishnan & P. H. Ritchken & J. B. Thomson, 2005. "Monitoring and Controlling Bank Risk: Does Risky Debt Help?," Journal of Finance, American Finance Association, vol. 60(1), pages 343-378, 02.
    17. 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.
    18. Covitz, Daniel M. & Harrison, Paul, 2004. "Do banks time bond issuance to trigger disclosure, due diligence, and investor scrutiny?," Journal of Financial Intermediation, Elsevier, vol. 13(3), pages 299-323, July.
    19. Julapa Jagtiani & George Kaufman & Catharine Lemieux, 2002. "The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 559-575.
    20. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
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