Has market discipline on banks improved after the Dodd–Frank Act?

Bhanu Balasubramnian and Ken B. Cyree

Journal of Banking & Finance, 2014, vol. 41, issue C, 155-166

Abstract: We investigate whether or not market discipline on banking firms changed after the Dodd–Frank Wall Street Reform and Consumer Protection Act (DFA) of 2010. If market discipline is improved, we should see a lower discount for size on yield spreads, particularly for banks identified as too-big-to-fail (TBTF) or systemically important (SIFI). Using secondary market subordinated debt transactions we find that the size discount is reduced by 47% and TBTF discount is reduced by 94% after the DFA. The DFA has been effective in reducing, but not in eliminating the size and TBTF discounts on yield spreads. Market discipline of banks appears to have improved further after the rating criteria changes by Moody’s.

Keywords: Subordinated debt; Yield spread; Default risk; Market discipline; Risk-sensitivity; Regulation (search for similar items in EconPapers)
JEL-codes: E44 G01 G18 G20 G21 G28 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:41:y:2014:i:c:p:155-166

DOI: 10.1016/j.jbankfin.2014.01.021

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