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The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period


  • Julapa Jagtiani
  • George Kaufman
  • Catharine Lemieux


In this article we examine whether the federal safety net is viewed by the market as being extended beyond "de jure" deposits to other bank debt and even the debt of bank holding companies (BHCs). We extend previous research by focusing on the post-FDICIA period and by examining the risk-return relation of bonds issued directly by banks, not BHCs. Our results provide evidence that both bank and BHC bonds are priced by the secondary market in relation to their underlying credit risk, particularly for less capitalized issuers, suggesting that proposals requiring banks to issue subordinated debt may enhance market monitoring and discipline and be useful in supplementing regulatory discipline. 2002 The Southern Finance Association and the Southwestern Finance Association.

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  • 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.
  • Handle: RePEc:bla:jfnres:v:25:y:2002:i:4:p:559-575

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    References listed on IDEAS

    1. William L. Beedles, 1978. "On The Use Of Certainty Equivalent Factors As Risk Proxies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 1(1), pages 15-21, December.
    2. Tsiang, S C, 1972. "The Rationale of the Mean-Standard Deviation Analysis, Skewness Preference, and the Demand for Money," American Economic Review, American Economic Association, vol. 62(3), pages 354-371, June.
    3. Machol, Robert E. & Lerner, Eugene M., 1969. "Risk, Ruin and Investment Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(04), pages 473-492, December.
    4. Cooley, Philip L, 1977. "A Multidimensional Analysis of Institutional Investor Perception of Risk," Journal of Finance, American Finance Association, vol. 32(1), pages 67-78, March.
    5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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