Bank Insolvency Risk and the Market for Large Certificates of Deposit

TLDR

The authors aim to determine whether the market for large certificates of deposit prices reflects bank risk‑taking. They employ newly available bank survey data to assess this relationship. They find that jumbo CD rates are influenced by proxy measures of insolvency likelihood, return volatility, capitalization, and area‑specific factors, supporting the hypothesis that the market prices bank risk. © 1988 Ohio State University Press.

Abstract

In this paper, the authors employ a new source of bank survey data to determine whe ther the market for large certificates of deposit exacts a price for bank risk taking. They find strong evidence that this is in fact the case. Proxy measures of the likelihood of bank insolvency, the variab ility of bank returns on assets, and bank capitalization are all foun d to influence jumbo CD rates in a manner consistent with this hypoth esis. Area-specific variables are also found to play an important rol e in explaining observed jumbo CD rates. Copyright 1988 by Ohio State University Press.