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

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Author Info
Adrian Pop (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
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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Date of creation: 23 Sep 2009
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Handle: RePEc:hal:wpaper:hal-00419241_v1

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  1. Douglas D. Evanoff & Larry D. Wall, 2001. "Sub-debt yield spreads as bank risk measures," Working Paper Series WP-01-03, Federal Reserve Bank of Chicago. [Downloadable!]
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  2. 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 and Southwestern Finance Association, vol. 25(4), pages 559-575. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October. [Downloadable!] (restricted)
  5. Charles W. Calomiris, 2006. "The Regulatory Record of the Greenspan Fed," American Economic Review, American Economic Association, vol. 96(2), pages 170-173, May. [Downloadable!]
  6. Evanoff, Douglas D. & Wall, Larry D., 2002. "Measures of the riskiness of banking organizations: Subordinated debt yields, risk-based capital, and examination ratings," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 989-1009, May. [Downloadable!] (restricted)
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  7. Sironi, Andrea, 2003. " Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-72, June.
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  8. Gropp, Reint & Vesala, Jukka & Vulpes, Giuseppe, 2006. "Equity and Bond Market Signals as Leading Indicators of Bank Fragility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 399-428, March. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Krishnan, C. N. V. & Ritchken, P. H. & Thomson, J. B., 2006. "On Credit-Spread Slopes and Predicting Bank Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1545-1574, September. [Downloadable!] (restricted)
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  12. 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)
  13. 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.
  14. 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. [Downloadable!]
  15. 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. [Downloadable!] (restricted)
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