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Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously

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  • Adrian Pop

    (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - IEMN-IAE Nantes - Institut d'Économie et de Management de Nantes - Institut d'Administration des Entreprises - Nantes - UN - Université de Nantes)

Abstract

The logic behind the indirect channel of market discipline presumes that the pricing of bank debt in the secondary market, if accurate, conveys to supervisor and other market participants a reliable signal of bank's financial conditions and default risk. By collecting a unique dataset of spreads, ratings, and accounting measures of bank risk for a sample of large European banking organizations during the 1995—2002 period, we empirically test whether secondary market prices accurately reflect financial conditions of bank issuers. Our results complement the findings obtained by Sironi [Testing for market discipline in the European banking industry: Evidence from subordinated debt issues. Journal of Money, Credit, and Banking 35 (2003) 443-472] on the primary market of bank subordinated debt

Suggested Citation

  • Adrian Pop, 2009. "Beyond the Third Pillar of Basel Two: Taking Bond Market Signals Seriously," Working Papers hal-00419241, HAL.
    • Handle: RePEc:hal:wpaper:hal-00419241
    Note: View the original document on HAL open archive server: https://hal.science/hal-00419241
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    References listed on IDEAS

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