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Funding Advantage and Market Discipline in the Canadian Banking Sector

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  • Mehdi Beyhaghi
  • Chris D'Souza
  • Gordon S. Roberts

Abstract

We employ a comprehensive data set and a variety of methods to provide evidence on the magnitude of large banks’ funding advantage in Canada, and on the extent to which market discipline exists across different securities issued by the Canadian banks. The banking sector in Canada provides a unique setting in which to examine market discipline along with the prospects of proposed reforms, because Canada has no history of government bailouts. Our results suggest that large banks likely have a funding advantage over small banks after controlling for bank-specific and market risk factors. Working with hand-collected market data on debt issues by large banks, we also find that market discipline exists for subordinated debt and not for senior debt.

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  • Mehdi Beyhaghi & Chris D'Souza & Gordon S. Roberts, 2013. "Funding Advantage and Market Discipline in the Canadian Banking Sector," Staff Working Papers 13-50, Bank of Canada.
    • Handle: RePEc:bca:bocawp:13-50
    DOI: 10.34989/swp-2013-50
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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