It has been argued that underpriced federal deposit insurance provides incentive for insured institutions to increase the value of shareholder equity by expanding into activities that shift risk onto the deposit insurer. Derivative instruments have been used by firms to change their risk...

This paper analyzes how financial markets reacted to S&L diversification into junk bonds. The authors 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, they examine the impact of junk bonds on...

Purpose – The purpose of this paper is to examine the implicit subsidies received, in the form of stock market returns, from the perception that large banking organizations are too big to fail, and implications for financial regulation. Design/methodology/approach – The empirical analysis...