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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Market Discipline in Banking Reconsidered: The Roles of Funding Manager Decisions and Deposit Insurance Reform
Daniel M. Covitz, Diana Hancock, and 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.

Keywords: Debt issuance, subordinated bonds

Full paper (645 KB PDF)

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Last update: October 15, 2004