Market discipline of banks: Why are yield spreads on bank-issued subordinated notes and debentures not sensitive to bank risks? |
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| Authors: | Bhanu Balasubramnian Ken B Cyree |
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| Institution: | a Emporia State University, 1200 Commercial Street, Emporia, KS 66801, USA
b The University of Mississippi, School of Business Administration, University, MS 38667, USA |
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| Abstract: | The default risk sensitivity of yield spreads on bank-issued subordinated notes and debentures (SNDs) decreased after banks started issuing trust-preferred securities (TPS). The too-big-to-fail (TBTF) discount on yield spreads is absent prior to the LTCM bailout, but the size discount doubles after the LTCM bailout. Prior to TPS issuance and the LTCM bailout, SND yield spreads are sensitive to conventional firm-specific default risk measures, but not after the bailout. We find paradigm shift in determinants of yield spreads after the LTCM bailout. Yield spreads on TPS are sensitive to default risks and can provide an additional source of market discipline. |
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| Keywords: | G01 G12 G20 G21 G28 |
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