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Why do Japanese regional banks issue subordinated debts?

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  • Baba, Naohiko
  • Inada, Masakazu
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    Abstract

    This paper empirically investigates the determinants of subordinated debt issuance by Japanese regional banks during the period of 2000-2007 using a probit model. The empirical results suggest the following. (i) Throughout the period, Japanese regional banks with a lower capital ratio tended to have a higher incentive to issue subordinated debts due possibly to their counting as Tier 2 capital under the Basel Accord. (ii) During the period of banking instability (2000-2003), subordinated debt investors tended to use financial variables such as the non-performing loan ratio, ROA, and ROE to screen good banks. (iii) During the period after the banking system regained stability (2004-2007), investors tended to pay less attention to the above variables due chiefly to the mitigated default risk of these banks.

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    Bibliographic Info

    Article provided by Elsevier in its journal Japan and the World Economy.

    Volume (Year): 21 (2009)
    Issue (Month): 4 (December)
    Pages: 358-364

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    Handle: RePEc:eee:japwor:v:21:y:2009:i:4:p:358-364

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    Web page: http://www.elsevier.com/locate/inca/505557

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    Keywords: Subordinated debt Japanese banks Basel Accord Market discipline Non-performing loan problem;

    References

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    1. Hancock Diana & Urs W. Birchler, 2004. "What Does the Yield on Subordinated Bank Debt Measure?," Working Papers 2004-02, Swiss National Bank.
    2. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics.
    3. Avery, Robert B & Belton, Terrence M & Goldberg, Michael A, 1988. "Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 597-610, November.
    4. Baba, Naohiko & Nishioka, Shinichi & Oda, Nobuyuki & Shirakawa, Masaaki & Ueda, Kazuo & Ugai, Hiroshi, 2005. "Japan's Deflation, Problems in the Financial System, and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(1), pages 47-111, February.
    5. Jeffrey A. Wurgler & Malcolm P. Baker, 2001. "Market Timing and Capital Structure," Yale School of Management Working Papers ysm181, Yale School of Management.
    6. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3433-3452, December.
    7. Mark M. Spiegel & Nobuyoshi Yamori, 2004. "The Evolution Of Bank Resolution Policies In Japan: Evidence From Market Equity Values," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 27(1), pages 115-132.
    8. Gorton, Gary & Santomero, Anthony M, 1990. "Market Discipline and Bank Subordinated Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 119-28, February.
    9. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "Market discipline in banking reconsidered: the roles of funding manager decisions and deposit insurance reform," Finance and Economics Discussion Series 2004-53, Board of Governors of the Federal Reserve System (U.S.).
    10. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "A reconsideration of the risk sensitivity of U.S. banking organization subordinated debt spreads: a sample selection approach," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 73-92.
    11. Imai, Masami, 2007. "The emergence of market monitoring in Japanese banks: Evidence from the subordinated debt market," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1441-1460, May.
    12. Spiegel, Mark M. & Yamori, Nobuyoshi, 2007. "Market price accounting and depositor discipline: The case of Japanese regional banks," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 769-786, March.
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