Does Mandatory Risk Information Disclosure Affect Bank Debt Design? Cross-Country Evidence from Yankee Bond Covenants

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This paper investigates the impact of mandatory risk disclosure on the design of foreign bank debt. The Basel II and III Accords require the public disclosure of bank regulatory information under the Pillar 3 or market discipline framework. The new information details bank risk exposures and management strategies, capital adequacy and remuneration practices to enhance market discipline through transparency. We target foreign issuers of US (“Yankee”) to test whether banks domiciled in Pillar 3 regimes increase debt raising in an overseas market and face reduced demand from investors for covenants. Pillar 3 reporting reduces the propensity of banks to raise debt capital abroad, a finding that is attenuated when the banks are domiciled in countries with superior creditor rights protections. Pillar 3 reporting increases the imposition of covenants in Yankee bonds, particularly for banks domiciled in countries with weaker debt law enforcement standards and stronger shareholder rights.