The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period

In this article we examine whether the federal safety net is viewed by the market as being extended beyond "de jure" deposits to other bank debt and even the debt of bank holding companies (BHCs). We extend previous research by focusing on the post-FDICIA period and by examining the risk-return relation of bonds issued directly by banks, not BHCs. Our results provide evidence that both bank and BHC bonds are priced by the secondary market in relation to their underlying credit risk, particularly for less capitalized issuers, suggesting that proposals requiring banks to issue subordinated debt may enhance market monitoring and discipline and be useful in supplementing regulatory discipline. 2002 The Southern Finance Association and the Southwestern Finance Association.