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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

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.

Suggested Citation

  • Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform," Finance and Economics Discussion Series 2004-53, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2004-53
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hyosoon Choi & Wook Sohn, 2014. "Regulatory Forbearance And Depositor Market Discipline: Evidence From Savings Banks In Korea," Contemporary Economic Policy, Western Economic Association International, vol. 32(1), pages 203-218, January.
    2. 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, September.
    3. Saoussen Ben Gamra, 2009. "Marchés obligataires et stabilité financière: L'expérience asiatique," CEPN Working Papers hal-00574161, HAL.
    4. 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.
    5. 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.

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