While market prices can be useful tools for bank regulation, recent theoretical work argues that reliance on prices can be counterproductive when secondary markets are stressed and illiquid. Evidence from the financial crisis unearthed by Bhat et al. (in press) provides empirical validation of these arguments. Though Bhat et al. do not fully acknowledge it, their findings suggest that forcing banks to count liquidity-induced unrealized losses in securities holdings against regulatory capital destroys value and exposes bank creditors, including taxpayers, to more risk. Policy makers contemplating greater regulatory reliance on market prices ignore these findings at their peril.

Cheng and Neamtiu examine whether credit rating agencies exploit market power to sell a substandard product. Their evidence is suggestive, but plausible alternative hypotheses could explain their results. Johnston, Markov and Ramnath provide first evidence on the bond and firm characteristics that determine the quantity of sell-side debt analyst coverage that a corporate bond receives. They also find that debt analysts anticipate credit rating changes and add information to markets incremental to credit ratings, suggesting debt analysts will be important to future research on bond markets. These results also suggest a method for refining tests of rating agency market power.