We provide evidence that a bank's subordinated debt yield spread is not, by itself, a sufficient measure of default risk. We use a model in which subordinated debt is held by investors with superior knowledge (informed investor). First, we show that in theory the yield spread on subordinated...

We provide evidence that a bank's subordinated debt yield spread is not, by itself, a sufficient measure of default risk. We use a model in which subordinated debt is held by investors with superior knowledge (informed investor). First, we show that in theory the yield spread on subordinated...

Because illiquid bonds may be relatively poorly priced, the ability to infer investor perceptions of changes in a banking organization's financial health from such bonds may be obscured. To examine the time-series effect of trading frequency on subordinated debt spreads, we consider the...

We find that the risk-sensitivity of bank holding company subordinated debt spreads at issuance increased with regulatory reforms that were designed to reduce conjectural government guarantees, but declined somewhat with subsequent reforms that were aimed in part at reducing regulatory...

This paper demonstrates that the risk sensitivity of a banking organization's subordinated debt yield spreads may understate the potential for market discipline in some periods and overstate in others because such spreads contain liquidity premiums that are driven, in part, by the...

Much research is needed to implement a supervisory surveillance system for banking organizations that relies on subordinated debt and other market data. This paper is germane to that task. We find subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e.,...

We consider the business strategy of some banks that provide relationship loans (where they have loan origination and monitoring advantages relative to capital markets) with core deposit funding (where they can pass along the benefit of a sticky price on deposits). These quot;traditional...

This paper considers the role of Federal Home Loan Bank (FHLB) advances in stabilizing their commercial bank members' residential mortgage lending activities. Our theoretical model shows that using mortgage-related membership criteria or requiring mortgage-related collateral does not ensure that...

Market data, such as bond spreads or equity price volatility, are a complementary source to bank supervisory information. In Switzerland, meaningful market data are available for a number of banks which constitute a major part of the banking system. Notwithstanding some limitations (biases due...