Financial fragility, uninsured deposits, and the cost of debt

Margot Quijano

The North American Journal of Economics and Finance, 2013, vol. 24, issue C, 159-175

Abstract: Using annual data from 1995 to 2009, I analyze the impact of banks’ financial fragility on the costs of U.S. corporate bank loans. Diamond and Rajan (2001) hypothesize that financially fragile banks are able to raise funds at a lower cost and competition among banks result in some of these benefits being passed on to borrowers. My results provide broad support for this hypothesis, as I find that a one standard deviation increase in a bank's financial fragility lowers the cost of this bank's corporate loans by 7%. Since some types of regulation, such as deposit insurance, can decrease banks’ financial fragility, this paper also contributes to the debate on the benefits and costs of bank regulation which can be helpful for policy-making.

Keywords: G20; G21; Uninsured deposits; Financial fragility; Bank loans (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:24:y:2013:i:c:p:159-175

DOI: 10.1016/j.najef.2012.10.001

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