Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper No. 2006-09
On the Market Discipline of Informationally-Opaque Firms:
Evidence from Bank Borrowers in the Federal Funds Market #
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005D
September 2006
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper No. 2006-09
On the Market Discipline of Informationally-Opaque Firms:
Evidence from Bank Borrowers in the Federal Funds Market #
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005D
September 2006
On the Market Discipline of Informationally‐Opaque Firms:
Evidence from Bank Borrowers in the Federal Funds Market #
Adam B. Ashcraft Hoyt Bleakley
Banking Studies Graduate School of Business
Federal Reserve Bank of
New York
University of Chicago
Adam.Ashcraft@ny.frb.org bleakley@gsb.uchicago.edu
September 7, 2006
Abstract
Using plausibly exogenous variation in demand for federal funds created by daily
shocks to reserve balances, we identify the supply curve facing a bank borrower in
the inter‐bank market, and study how access to overnight credit is affected by
changes in public and private measures of borrower creditworthiness. While there is
evidence that lenders respond to adverse changes in public information about credit
quality by restricting access to the market in a fashion consistent with market
discipline, there is also evidence that borrowers are able to respond to adverse
changes in private information about credit quality by increasing leverage as if to
offset the future impact on earnings. While the responsiveness of investors to public
information is comforting, we document evidence which suggests that banks are able
to manage the real information content of these disclosures. In particular, public
measures of loan portfolio performance have information about future loan charge‐
offs, but only in quarters when the bank is examined by supervisors. However, the
loan supply curve is not any more sensitive to public disclosures about non‐
performing loans in an exam quarter, suggesting that investors are unaware of this
information management.
# The authors acknowledge the receipt of financial support through a research grant from the Federal Deposit Insurance
Corporation. We appreciate comments from Mark Flannery, Larry Wall, Tom King, Vasso Ioannidou, as well as
participants at the Center for Financial Research at the FDIC, the Banking Studies Brown Bag Lunch at the Federal
Reserve Bank of New York, the Federal Reserve System Banking Conference, the FRB‐NYU Conference on Financial
Intermediation, and the Department of Finance at Tilburg University. Any remaining errors are our own, and the views
expressed here are those of the authors and not of the Federal Deposit Insurance Corporation, the Federal Reserve Bank of
New York or the Federal Reserve System.