How does subordinated debt affect the cost of capital for banks?

Leyla Yusifzada

Pacific-Basin Finance Journal, 2025, vol. 91, issue C

Abstract: This paper studies the relationship between banks’ subordinated debt and the cost of capital in OECD countries from 2000 to 2019. Consistent with the hypothesis that subordinated debt disciplines risk-taking, empirical results show that the total cost of capital decreases with subordinated debt, keeping the equity capitalization and deposits constant. The main results hold for the US and the EU subsamples and are driven by the Global Financial Crisis of 2007–2009. Furthermore, the paper demonstrates that one-time subordinated debt issuance and low levels of subordinated debt do not suffice to discipline risk-taking.

Keywords: Banking regulation; Subordinated debt; Market discipline; Cost of capital; Cost of equity; Cost of debt (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:91:y:2025:i:c:s0927538x25000514

DOI: 10.1016/j.pacfin.2025.102714

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