Essays on the information contents of bank subordinated debt spreads and the pricings of bank loans and services

This dissertation is a collection of three essays on banking topics related to pricing of bank loans and services, and information content of bank subordinated debts. The main focus of the first essay is to address sensitivity and timeliness issues of bank subordinated debt spreads in assessing bank risk. Previous studies in this area have examined the relationship between spread and accounting or enhanced accounting indicators of bank risk. The backward looking nature of accounting variables creates econometric specification problems for the standard OLS and fixed-effects estimators. I propose the use of a GMM estimator to address this issue, in addition to three equity market indicators of risk to address the timeliness and risk sensitivity issues. For the study period of Q3:1992-Q2:2001, the subordinated debt spread is significantly sensitive to these market indicators of risk. These results, however, do not extend to the uninsured CD spread during the same period. I also find supporting evidence that both equity and debt markets actively monitor bank risk in a timely fashion, using the Granger causality test between spread and each of the market indicators of risk within panel VAR analysis. The findings suggest that subordinated debt spread could potentially provide a timely indicator of bank risk to other market participants and regulators.; The second essay investigates a case study of a mega-merger of two regional banks in New England in 1999 and assesses its impact on market power in some segment of the lending markets. Prior to the merger, these banks charged small- and medium-sized middle-market borrowers unusually low interest rates on loans, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to those borrowers, with the exception of small middle-market borrowers. The finding suggests that regulators should consider the consequences of concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements.; The last essay investigates how banking relationships affect the terms of lending, through both supply- and demand-side effects, and the underwriting costs of debt and equity issues. The micro-level loan and underwriting data are used to investigate pricing effects of the joint production of loans and security underwritings within the context of relationship banking using a dataset of complete financial histories of 7,315 firms for the period from 1992 to 2002. There is strong evidence that banks price loans and underwriting services in a strategic way to extract value from their relationships. In particular, banks charge premiums for both loans and underwriting services to extract value from their combined relationships. Part of this value may include a reduced demand for borrowing, which takes the form of reduced demand for lines of credit.