This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Monitoring and controlling bank risk: does risky debt serve any purpose?

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
C. N. V. Krishnan
P. H. Ritchken
J. B. Thomson

Additional information is available for the following registered author(s):

Abstract

To examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk-taking, the authors extract the credit-spread curve for each banking firm in their sample. After controlling for changes in market and liquidity variables, they find that changes in credit spreads do not reflect changes in bank risk variables. The result is robust to firm type, examination rating, size, leverage, and profitability, as well as to different model specifications. They also find that issuing subordinated debt does not alter banks' risk-taking behavior. They conclude that a mandatory subordinated debt requirement for banks is unlikely to provide the intended benefits of enhancing risk-monitoring or controlling risk-taking.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.clevelandfed.org/Research/Workpaper/2003/wp03-01.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0301.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 2003
Date of revision:
Handle: RePEc:fip:fedcwp:0301

Contact details of provider:
Postal: 1455 East 6th St., Cleveland OH 44114
Phone: 216.579.2000
Web page: http://www.clevelandfed.org/
More information through EDIRC

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Bank capital Risk

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, pages 641-670.
    Other versions:
  2. Sarig, Oded & Warga, Arthur, 1989. " Some Empirical Estimates of the Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(5), pages 1351-60, December. [Downloadable!] (restricted)
  3. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02. [Downloadable!] (restricted)
  4. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago. [Downloadable!]
  5. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July. [Downloadable!] (restricted)
  6. Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer, vol. 20(2), pages 195-208, October. [Downloadable!] (restricted)
  7. Basel Committee on Banking Supervision, 1999. "A New Capital Adequacy Framework," BASEL Committee Papers bc0001, Australian Prudential Regulation Authority. [Downloadable!]
  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. [Downloadable!] (restricted)
  9. Donald P. Morgan & Kevin J. Stiroh, 2000. "Bond market discipline of banks," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 494-526.
  10. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July. [Downloadable!] (restricted)
    Other versions:
  11. anonymous, 1999. "Using subordinated debt as an instrument of market discipline," Staff Studies 172, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  13. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 687-720.
  14. 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. [Downloadable!] (restricted)
  15. Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
  16. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December. [Downloadable!] (restricted)
  17. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," NBER Working Papers 8961, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  18. Levent Güntay & N. R. Prabhala & Haluk Unal, . "Callable Bonds and Hedging," Center for Financial Institutions Working Papers 02-13, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  19. Douglas D. Evanoff & Larry D. Wall, 2000. "Subordinated debt as bank capital: a proposal for regulatory reform," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 40-53. [Downloadable!]
  20. Julapa Jagtiani & George Kaufman & Catharine Lemieux, 1999. "Do markets discipline banks and bank holding companies? evidence from debt pricing," Emerging Issues, Federal Reserve Bank of Chicago, issue Jun. [Downloadable!]
  21. Hannan, Timothy H & Hanweck, Gerald A, 1988. "Bank Insolvency Risk and the Market for Large Certificates of Deposit," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203-11, May. [Downloadable!] (restricted)
    Other versions:
  22. Kwan, Simon H., 1996. "Firm-specific information and the correlation between individual stocks and bonds," Journal of Financial Economics, Elsevier, vol. 40(1), pages 63-80, January. [Downloadable!] (restricted)
  23. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March. [Downloadable!] (restricted)
Full references

Statistics
Access and download statistics

Did you know? IDEAS also indexes book chapters.

This page was last updated on 2008-9-12.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.