 Subordinated Debt and Market Discipline in CanadaGreg Caldwell Staff Working Papers from Bank of Canada Abstract: The author documents the use by Canadian banks of subordinated debt (SD) as a capital instrument. He reviews the economic benefits of this asset as a mechanism for market discipline and highlights academic and policy research over the past 20 years. The author provides both qualitative and quantitative summaries of the current regulatory and market environment in Canada, and conducts a Tobit analysis of factors that affect a bank's decision to issue SD. He also constructs a cross-section time-series sample of banks, into which controls for fixed effects, along with other non-default risk factors, are incorporated. Results for domestic banks show that, whenever there exists a high degree of gross impaired non-mortgage loans and mortgage writeoffs relative to assets, banks are less likely to issue SD. In contrast, increases in past-due (but still unimpaired) non-mortgage loans have a positive effect on SD issuance. This suggests that domestic banks 'time' their issuance decisions to avoid market discipline. Keywords: Financial; institutions (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:05-40 Access Statistics for this paper More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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