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Bond market development and bank stability: Evidence from emerging markets

Shu Tian, Donghyun Park () and Marie Anne Cagas

Research in International Business and Finance, 2021, vol. 58, issue C

Abstract: We investigate how bond market development shapes banks’ risk taking in terms of portfolio structure, liquidity risk, and overall bank risk. Exploiting a bank-level database of 26 emerging markets, we find that larger bond markets are associated with stronger bank liquidity positions, lower portfolio risk of banks, and higher overall stability of banks. The effect of bond market development on bank risk taking remains robust across different levels of bank size and capital sufficiency. Overall, we find new evidence of a complementary relationship between bond market development and bank soundness.

Keywords: Emerging market; Bond market; Bank; Liquidity risk; Bank stability; Risk taking (search for similar items in EconPapers)
JEL-codes: G10 G18 G21 G28 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.ribaf.2021.101498

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