The Financial Premium

Jens Dick-Nielsen, Feldhütter, Peter and David Lando

No 20307, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that bonds issued by financial firms have higher spreads than bonds issued by industrial firms with the same rating and maturity, and we call this difference the financial premium. During the period 1987–2020 the premium is on average 43bps in the U.S., higher for lower ratings, higher in financial crises, and is increasing in bond beta. We derive a model that explains the financial premium: banks hold diversified portfolios of non-financial debt and bank debt therefore reflect more systematic risk than non-financial debt.

Keywords: Credit; spreads (search for similar items in EconPapers)
JEL-codes: C23 G12 (search for similar items in EconPapers)
Date: 2025-05
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