Subordinated Debt, Market Discipline, and Bank Risk

Yehning Chen and Iftekhar Hasan

Journal of Money, Credit and Banking, 2011, vol. 43, issue 6, 1043-1072

Abstract: This paper demonstrates that subordinated debt (subdebt thereafter) regulation can be an effective mechanism for disciplining banks. By reducing the chance that managers of distressed banks can take value‐destroying actions to benefit themselves, subdebt regulation may encourage banks to lower asset risk. Moreover, subdebt regulation and bank capital requirements can be complements for alleviating the banks’ moral hazard problems. To make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require subdebt to convert into the issuing bank's equity when the government provides assistance to the bank.

Date: 2011
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https://doi.org/10.1111/j.1538-4616.2011.00417.x

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Journal Article: Subordinated Debt, Market Discipline, and Bank Risk (2011)
Working Paper: Subordinated debt, market discipline, and bank risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:43:y:2011:i:6:p:1043-1072

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