Mk. Hassan et al., DEPOSIT INSURANCE, MARKET DISCIPLINE AND OFF-BALANCE SHEET BANKING RISK OF LARGE UNITED-STATES COMMERCIAL-BANKS, Journal of banking & finance, 18(3), 1994, pp. 575-593
The 'market discipline' of off-balance sheet banking activities (OBSAs
) is examined by employing contingent claims valuation techniques to d
erive implied asset variances from bank equity, and from risk-premia f
or bank subordinated debt. Specifically, implied asset variances have
been calculated from market and on and off-balance sheet information u
sing options pricing techniques. Theoretically these implied asset var
iances are better than equity variance or risk-premia in proxying bank
risk because they capture portfolio effects as well as the non-linear
nature of contingent claims model and the impact of closure rules. Em
pirical results suggest the existence of 'market discipline' of OBSAs.
Market participants price these OBSAs as risk-reducing.