Bank Insolvency Risk and the Market for Large Certificates of Deposit

In this paper, the authors employ a new source of bank survey data to determine whe ther the market for large certificates of deposit exacts a price for bank risk taking. They find strong evidence that this is in fact the case. Proxy measures of the likelihood of bank insolvency, the variab ility of bank returns on assets, and bank capitalization are all foun d to influence jumbo CD rates in a manner consistent with this hypoth esis. Area-specific variables are also found to play an important rol e in explaining observed jumbo CD rates.