If bond investors agree that SPOE [single point of entry, where parent companies are responsible for the losses of failing subsidiaries] has made the parent riskier, we should see the parent’s option-adjusted spread (OAS) widen relative to that of the subsidiary bank. Contrary to our hypothesis, and the views of rating agencies, the chart below shows that the spread gap has not widened consistently for three of the four holding companies; for the fourth, Bank of America, it has actually narrowed. Nor did the difference in spreads widen noticeably after each of the agencies started to increase the rating gap between parent companies and their bank subsidiaries.
Gara Afonso, Michael Blank, and João Santos
Federal Reserve Bank of New York
March 5, 2018
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