Abstract
This paper examines the extent to which implicit subsidies are embedded in the bond spreads for large Australian banks and whether early implementation of the Basel III capital framework reduces the ability of banks to capture these subsidies. Using primary market data from 2004 to 2015, We find evidence that: (i) large banks benefit from substantial subsidies, (ii) bond investors are less sensitive to the risks of large banks and (iii) implicit subsidies captured by large banks are reduced since the implementation of the Basel III capital reforms.
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