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Title: Market discipline of bank risk : evidence from subordinated debt contracts
Authors: Goyal, Vidhan K.
Keywords: Bank risk taking
Subordinated debtholders
Market discipline
Debt covenants
Banking regulation
Issue Date: Jun-2003
Abstract: Do bank debtholders discipline excessive risk taking? I investigate this question by examining how a bank's incentives to take risks affect offering yield spreads and restrictive covenants in their debt contracts. Results suggest that bank charter values, which determine a bank's risk taking incentives, significantly affect the likelihood of restrictive covenants in bank debt contracts. This effect is most pronounced during the 1980s, when greater competition and relatively less stringent regulation increased the severity of moral hazard problems in the U.S. banking industry. Overall, the results suggest that an important channel for market investors to discipline bank risk taking is through writing restrictive covenants in bank debt.
Appears in Collections:FINA Working Papers

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