 Quantity effects and the market discipline mechanism: A bivariate analysisAdrian Pop ()
Post-Print from HAL Abstract: A straightforward method to enhance market discipline in banking is the mandatory Sub-Debt Policy (SDP), i.e. a requirement by which some large banks are forced to regularly issue a minimum amount of subordinated and non-guaranteed debt. If the decision of issuing sub-debt is endogenous and/or subordinated creditors are able to influence bank managers' behavior, we should observe a positive correlation between the amount of sub-debt held in bank balance sheets and banking performance. By conducting statistical tests on a panel dataset comprising the largest European banks, we find that: (i) the sub-debt issues are made generally by the most profitable banking organizations; (ii) voluntary sub-debt issues allow banks to reduce their Tier 1 ratios, while improving their overall capitalization (Tier 1 + Tier 2 ratios); (iii) the amount of sub-debt is negatively correlated with the quality of credit portfolio, but positively correlated with the ratio of loan loss reserve to total loans. These results arouse several reflections about the virtues and limitations of market discipline in banking in the absence of a formal SDP. Keywords: Banking regulation; Market discipline; Mandatory Sub-Debt Policy (search for similar items in EconPapers) Published in Journal of Banking Regulation, 2009, 10 (2), pp.164-175. ⟨10.1057/jbr.2008.25⟩ There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04212809 DOI: 10.1057/jbr.2008.25 Access Statistics for this paper More papers in Post-Print from HAL |
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