Keywords: Debt issuance, subordinated bonds
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.
Full paper (645 KB PDF)
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Last update: October 15, 2004