Underwriting as Certification of Bank Bonds

Abstract

Banks distribute corporate debt by selling their reputation as underwriters to investors in debt markets. Nevertheless, a little explored area is the certification role of banks in placing their own bond debt. In particular, the bank-specific alternative choice of self-underwriting versus the exclusive use of third-party underwriting. Moreover, bank reputation was damaged during the recent crisis and the question of how banks certify their bond debt in such times remains an unresolved issue. We use a sample of bank bond own deals from 24 European countries, that permits a unique identification of banks’ underwriting choices: self-underwriting takes place almost entirely in domestic bond markets and it is undertaken by banks in the less reputable underwriting group. Third-party underwriting takes place mostly in Euro-bond markets where both reputable and less reputable underwriters operate. We show that strong underwriter reputation brings significant differences in yield and fee benefits and that these differences are actually larger in crisis years. Over the 2003-2013 period we find that issuer banks could save Eur 11 million per deal when that transaction was placed by a reputable underwriter, while they lost Eur 9 million per deal when the deal was managed by an underwriter in a less reputable group. Despite those benefits, banks may alternatively decide to self-issue if they have disincentives to share information on their financial status with competitors.

Keywords: banks, underwriter, bond, debt certification

JEL Classification: G21, G24