This paper is the first study investigates how bond market development will shape bank risk-taking, in terms of portfolio risks, liquidity risk and overall bank risk. Exploiting a bank-level sample from 26 developing markets from 2006 to 2017, this study finds that bond market development lowers bank portfolio risks and overall risks, as well as strengthens bank liquidity position. Government bond serves as liquid assets that allows banks asset expansion without impairing bank risk positions. Corporate bond works as stable funding and alternative risky asset class that contribute to bank stability while facilitate risky asset holding. Large and well-capitalized banks benefit more from bond market development to take risk while maintaining resilience. This study presents new evidence on the complement role of a well-functioning bond market on bank soundness, offering policy implications on the important of capital market development and a well-balanced bond market structure.
Seminar will be live-streamed, allowing for online audience participation (only available during the seminar)