Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues
نویسنده
چکیده
The question of whether private investors can discriminate between the risk taken by banks is empirically investigated by testing the risk sensitivity of European banks’ subordinated notes and debentures (SND) spreads. A unique dataset of spreads, ratings, accounting and market measures of bank risk is used for a sample of SND issued during the 1991-2000:Q1 period. Moody’s Bank Financial Strength (MBFS) and FitchIBCA Individual (FII) ratings, which omit the influence of government and other external support on risk borne by investors, are found to perform better than accounting variables in explaining the variability of spreads. Empirical results support the hypothesis that SND investors are sensitive to bank risk, with the exception of SND issued by public banks, i.e. government owned or guaranteed institutions. Results also show that the risk sensitivity of SND spreads has improved during the nineties. JEL Classification Numbers: G15, G21, G28
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