Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets

Robert B Avery, Terrence M Belton and Michael A Goldberg

Journal of Money, Credit and Banking, 1988, vol. 20, issue 4, 597-610

Abstract: This study evaluates the potential for bank subordinated notes and debentures to enhance market discipline by analyzing the sensitivity of the interest-rate spread between bank-related debt and comparable Treasury securities to measu res of bank risk. The analysis indicates that the market discipline benefits of subordinated notes and debentures appear to be relatively small. Furthermore, even if the bond rating agencies could induce bankers to behave in a particular way, the findings suggest this induced behavior may not be viewed by regulators as consistent with their standards of safety and soundness. Copyright 1988 by Ohio State University Press.

Date: 1988
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:20:y:1988:i:4:p:597-610

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