Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983–1991

Abstract

We examine debenture yields over the period 1983–1991 to evaluate the market's sensitivity to bank‐specific risks, and conclude that investors have rationally reflected changes in the government's policy toward absorbing private losses in the event of a bank failure. Although this evidence does not establish that market discipline can effectively control banking firms, it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major U.S. banking firms.

An Examination of Multiple Governance Forces within Bank Holding Companies

“…The empirical evidence suggests that each of these claimants exert discipline on large banks. First, several studies demonstrate that subordinated debtholders exert market discipline on banks (e.g., Evanoff and Wall, 2001;John et al, 2004;Flannery and Sorescu, 1996). Second, the federal funds market appears to exert a small amount of discipline on banks (e.g., Furfine, 2001;King, 2003).…”

Managerial Risk-Taking Behavior: A Too-Big-To-Fail Story

“…We did not extend the pre-and post-TBTF periods beyond 4 years because of substantive bank responses to changes in the TBTF policy in 1989 (Flannery and Sorescu 1996). After accounting for missing data and a 1-year time difference between the dependent and predictor variables in the empirical models, the panel dataset covers a total of 37 banks (of which 10 are TBTF) with 188 bank-year observations over an 8-year period.…”

Information Disclosure, Market Discipline and the Management of Bank Capital: Evidence from the Chinese Financial Sector

“…It customarily employs a yield spread measure (the difference between the market yield on bank debt and a risk-free asset such as government paper) as an indicator of the market's perception of bank risk. Studies in this vein, to date all conducted on US institutions, include: Baer and Brewer (1986), Ellis and Flannery (1992), who both analyse certificates of deposit, Flannery and Sorescu (1996) who examine debenture yields, and Jagitani and Lemieux (2001) who focus on the bond prices of bank holding companies. In terms of the European banking industry, Sironi (2003) investigates the risk sensitivity of spreads on subordinated notes and debentures for a sample of banks between 1991-2000.…”