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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform
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.


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Daniel M. Covitz & Diana Hancock & Myron L. Kwast, Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2004-53, 2004.
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Keywords: Banks and banking ; Risk management ; Deposit insurance
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