Standby letters of credit and bank capital: Evidence of market discipline

Market discipline, if it exists and is important, should link bank decisions together and have an impact on the way decisions are made. The relationship between the issuance of standby letters of credit and primary capital is modeled in the context of market discipline and then estimated. The hypothesis that market discipline causes a joint relationship between bank capital and standby letter of credit decisions for banks that are active participants in the standby market or that rely heavily on purchased funds is tested and cannot be rejected.