Market Discipline of Canadian Banks’ Letters of Credit Activities: An Empirical Examination
نویسندگان
چکیده
Although U.S. off-balance sheet (OBS) banking activities have been studied both theoretically and empirically, no paper studies Canadian OBS banking activities, which are growing larger each year. This paper supports the market discipline hypothesis of Canadian bank letters of credit (LC) activities by employing several market measures of risk from one-factor and multifactor models, including an implied asset volatility from the option-pricing model. Furthermore, it examines both the price and quantity response of OBS activities in the Canadian banking market by using a Tobit analysis to assess the robustness of the conclusions about market discipline. The results indicate that the various market measures of risk and LC are negatively related. Moreover, banks with greater portfolio risk, measured in terms of equity and asset risk, as well as high leverage and interest rate risk, are less likely to issue LC.
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