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An Empirical Test of the Incentive Effects of Deposit Insurance: The Case of Junk Bonds at Savings and Loan Associations

This paper analyzes how financial markets reacted to S&L diversification into junk bonds. We report that junk bond holdings are positively correlated with both the volatility of S&L equity returns and the interest rates paid on large CDs. Next, we examine the impact of junk bonds on equity r...

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Published in:	Journal of money, credit and banking credit and banking, 1994-02, Vol.26 (1), p.146-164
Main Authors:	Brewer, Elijah, Mondschean, Thomas H.
Format:	Article
Language:	English
Subjects:	Banking law Bonds Capital markets Coefficients Common stock Credit market Credit markets Deposit insurance Economic aspects Financial investments Insurance Investment risk Junk bonds Market value Mortgage loans Savings and loan associations Savings banks Variable coefficients
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container_title	Journal of money, credit and banking
container_volume	26
creator	Brewer, Elijah Mondschean, Thomas H.
description	This paper analyzes how financial markets reacted to S&L diversification into junk bonds. We report that junk bond holdings are positively correlated with both the volatility of S&L equity returns and the interest rates paid on large CDs. Next, we examine the impact of junk bonds on equity returns. For poorly capitalized S&Ls, greater risk taking increases the value of deposit insurance and should lead to higher stock returns. However, a well-capitalized institution that increases junk bond holdings should not experience stock price gains. We find that this is the case for the sample of S&Ls we studied. (Printed by permission of the publisher.)
doi_str_mv	10.2307/2078039
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source	International Bibliography of the Social Sciences (IBSS); JSTOR Archival Journals and Primary Sources Collection; ABI/INFORM Global
subjects	Banking law Bonds Capital markets Coefficients Common stock Credit market Credit markets Deposit insurance Economic aspects Financial investments Insurance Investment risk Junk bonds Market value Mortgage loans Savings and loan associations Savings banks Variable coefficients
title	An Empirical Test of the Incentive Effects of Deposit Insurance: The Case of Junk Bonds at Savings and Loan Associations
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