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Market discipline and subordinated debt: a review of some salient issues

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  • Robert R. Bliss
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    Abstract

    Requiring banks to issue subordinated debt is one proposal to bring market discipline to bear in aiding regulatory supervision. This article explores the frictions that produce a need for discipline (agency problems) and the mechanisms markets have evolved for dealing with these frictions. Following an examination of the rationales and assumptions underlying subordinated debt proposals, the article concludes that the case tying regulatory intervention to subordinated debt spreads is not clear-cut, and that use of all available information, including equity returns and debt yields, when available, is more likely to achieve regulatory goals.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

    Volume (Year): (2001)
    Issue (Month): Q I ()
    Pages: 24-45

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    Handle: RePEc:fip:fedhep:y:2001:i:qi:p:24-45:n:v.25no.1

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    Keywords: Debt ; Bank examination ; Bank supervision ; Debt;

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    Cited by:
    1. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2003. "Can feedback from the jumbo-CD market improve bank surveillance?," Working Papers, Federal Reserve Bank of St. Louis 2003-041, Federal Reserve Bank of St. Louis.
    2. Décamps, Jean-Paul & Rochet, Jean-Charles & Roger, Benoît, 2003. "The Three Pillars of Basel II, Optimizing the Mix," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 179, Institut d'Économie Industrielle (IDEI), Toulouse.
    3. Andrea Sironi, 2001. "An Analysis of European Banks' SND Issues and its Implications for the Design of a Mandatory Subordinated Debt Policy," Journal of Financial Services Research, Springer, Springer, vol. 20(2), pages 233-266, October.
    4. Décamps, Jean-Paul & Djembissi, Bertrand, 2005. "Switching to a Poor Business Activity: Optimal Capital Structure, Agency Costs and Convenant Rules," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 375, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Opiela, Timothy P., 2004. "Was there an implicit full guarantee at financial institutions in Thailand? Evidence of risk pricing by depositors," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 519-541, September.
    6. Robert R. Bliss, 2000. "The pitfalls in inferring risk from financial market data," Working Paper Series, Federal Reserve Bank of Chicago WP-00-24, Federal Reserve Bank of Chicago.
    7. Chen, Andrew H. & Robinson, Kenneth J. & Siems, Thomas F., 2004. "The wealth effects from a subordinated debt policy: evidence from passage of the Gramm-Leach-Bliley Act," Review of Financial Economics, Elsevier, Elsevier, vol. 13(1-2), pages 103-119.
    8. Chen , Yehning & Hasan, Iftekhar, 2011. "Subordinated debt, market discipline, and bank risk," Research Discussion Papers 20/2011, Bank of Finland.
    9. Krishnan, C. N. V. & Ritchken, P. H. & Thomson, J. B., 2006. "On Credit-Spread Slopes and Predicting Bank Risk," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1545-1574, September.
    10. Nivorozhkin, Eugene, 2005. "Market discipline of subordinated debt in banking: The case of costly bankruptcy," European Journal of Operational Research, Elsevier, Elsevier, vol. 161(2), pages 364-376, March.
    11. Balasubramnian, Bhanu & Cyree, Ken B., 2011. "Market discipline of banks: Why are yield spreads on bank-issued subordinated notes and debentures not sensitive to bank risks?," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 21-35, January.
    12. Agoraki, Maria-Eleni K. & Delis, Manthos D. & Pasiouras, Fotios, 2011. "Regulations, competition and bank risk-taking in transition countries," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(1), pages 38-48, January.
    13. Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Working Papers, Bank of Canada 07-9, Bank of Canada.
    14. Polo, Andrea, 2007. "Corporate governance of banks: the current state of the debate," MPRA Paper 2325, University Library of Munich, Germany.
    15. John R. Hall & Thomas B. King & Andrew P. Meyer & Mark D. Vaughan, 2002. "Do jumbo-CD holders care about anything?," Supervisory Policy Analysis Working Papers, Federal Reserve Bank of St. Louis 2002-05, Federal Reserve Bank of St. Louis.
    16. Jean-Charles Rochet, 2004. "Rebalancing the three pillars of Basel II," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sep, pages 7-21.

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