Debt Underwriting by Commercial Bank-Affiliated Firms and Investment

Banks: More Evidence

Ivan Carl Roten 

December 8, 2000 

Bank Underwriting Regulation

Glass-Steagall Act (1933)

Section 20 Relaxation (1986, 1989, 1990, 1997)

Financial Modernization Act (1999)

Previous Literature

Pre-Glass-Steagall Act of 1933 Ang and Richardson (1994), Krozner and Rajan

(1994), Puri (1994)

Post-Glass-Steagall Act of 1933 Gande, et al (1997), Gande et al (1999)

Miscellaneous Megginson and Weiss (1991), Livingston and

Miller (1998)

Data Sample

SDC - Security Data CorporationLPC – Loan Pricing Corporation

Period – 01/01/1995 to 12/31/1998

Debt underwriting 1,362 issues

Gross spread / Yield spread

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Quarters (1995-98)

Pe

rce

nt

Gross spread Yield spread

Descriptive Statistics

Variables All Section 20 Non-S 20 Number of Issues 1362 321 1041GROSS SPREAD (%) 0.92 0.84 0.94

YIELD SPREAD 130.12 129.28 130.38ISSUE AMOUNT ($ mill) 176.85 113.88 196.27FILE AMOUNT ($ mill) 933.01 727.66 996.34MATURITY (yrs.) 14.4 11.3 15.36MTNs (%) 22.1 38.94 16.91REPUTATION (%) 11.15 5.07 13.03

Models

Dependent Variables:GROSS SPREAD and YIELD SPREAD

Independent Variables:SECTION, LN (SMKT), LN(STAKE), EXCHANGE

LN (ISSUE), REFINANCE, SENIOR, REP, MAT

CREDIT RATING, QUARTER, INDUSTRY

LN(FILE), SHELF, MTN, FRBSHIFT, LN(MAT)

Gross spread results: Parsimonious Model

VariableCONSTANTSECTIONLN(SMKT)LN(STAKE)LN(ISSUE)REPHIMATLOWMATQUARTER

Coeff p-value0.955 0.000  -0.010 0.042 0.021 0.000-0.003 0.009 0.203 0.000-0.202 0.000-0.004 0.042

Coeff p-value 1.016 0.000-0.080 0.011  0.002 0.809 0.019 0.001-0.004 0.001 0.201 0.000-0.204 0.000-0.003 0.080

Coeff p-value 0.993 0.000 -0.016 0.841-0.010 0.042 0.021 0.000-0.003 0.010 0.203 0.000-0.202 0.000-0.003 0.328

Gross spread results: Extended Model

VariableCONSTSECTIONLN(SMKT)LN(STAK)LN(FILE)LN(ISSUE)MTNSHELFREPLN(MAT)FRBSHIFT

Coeff p-value Coeff p-value 0.916 0.000 0.861 0.000-0.082 0.004

-0.007 0.893 0.005 0.365 -0.007 0.172-0.041 0.001 -0.039 0.001 0.006 0.559 0.008 0.421-0.076 0.027 -0.074 0.032-0.206 0.000 -0.208 0.000-0.004 0.001 -0.003 0.011 0.180 0.000 0.181 0.000 0.003 0.846 0.000 0.984

Yield spread results: Parsimonious Model

VariableCONSTSECTIONLN(SMKT)LN(STAK)LN(ISSUE)REPHIMATLOWMATQUARTER

Coeff p-value 0.185 0.993 

-0.905 0.396 -1.973 0.126 -0.163 0.495 22.370 0.000-16.299 0.000 1.950 0.000

Coeff p-value -1.483 0.948 2.186 0.691  -1.228 0.295 -1.910 0.140 -0.132 0.61122.428 0.000-16.242 0.000 1.934 0.000

Coeff p-value-78.576 0.027  33.173 0.022 -0.949 0.374 -2.094 0.103 -0.187 0.434 22.344 0.000-16.631 0.000 0.778 0.239

Yield spread results: Extended Model

VariableCONSTSECTIONLN(SMKT)LN(STAK)LN(FILE)LN(ISSUE)SHELFMTNREPLN(MAT)QUARTER 

Coeff p-value10.557 0.711 -1.762 0.727

-0.815 0.448 -3.780 0.077 -2.926 0.135-19.987 0.017-17.615 0.001 -0.645 0.010 19.166 0.000

 

Coeff p-value-3.876 0.893 1.663 0.763 -0.769 0.509-3.091 0.196-3.689 0.099-22.500 0.011 -9.944 0.103 -0.097 0.70815.435 0.000 2.312 0.000

Coeff p-val-84.803 0.020

34.603 0.016 -0.563 0.592 -2.951 0.210 -3.954 0.076-23.290 0.009-10.247 0.091 -0.145 0.545 15.471 0.000 1.102 0.084

Summary

Gross Spread Section 20s - Lower gross spread, especially

non-investment grade issues Reputation - lower gross spread

MTNs - lower gross spread

Policy change – No support

Summary

Yield Spread Section 20s – No Support

Reputation – Lower yield

Policy Change – No support

MTNs - Lower yield