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The emergence of market monitoring in Japanese banks: Evidence from the subordinated debt market

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  • Imai, Masami

Abstract

This paper uses a unique data set on the spreads of subordinated debts issued by Japanese banks to investigate the presence of market monitoring. The results show that subordinated debt investors punished risky banks by requiring higher interest rates. Moreover, I find that the sensitivity of spreads to bank risk increased dramatically after the Japanese government allowed a large city bank, Hokkaido Takushoku Bank, and passed Financial Reform Act and the Rapid Revitalization Act in the late 1990s.
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  • 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.
    • Handle: RePEc:eee:jbfina:v:31:y:2007:i:5:p:1441-1460
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    Cited by:

    1. Zhang, Zhichao & Song, Wei & Sun, Xin & Shi, Nan, 2014. "Subordinated debt as instrument of market discipline: Risk sensitivity of sub-debt yield spreads in UK banking," Journal of Economics and Business, Elsevier, vol. 73(C), pages 1-21.
    2. Wu, Yuliang & Bowe, Michael, 2012. "Information disclosure and depositor discipline in the Chinese banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 855-878.
    3. Chih-Yung Wang & Yu-Fen Chen & Gu-Shin Tung, 2010. "Does Subordinated Debt Play a Role for Market Discipline?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(1), pages 27-33, January.
    4. repec:taf:applec:v:49:y:2017:i:29:p:2851-2860 is not listed on IDEAS
    5. Chih-Yung Wang & Yu-Fen Chen & Gu-Shin Tung, 2010. "Does Subordinated Debt Play a Role for Market Discipline?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(1), pages 27-33, January.
    6. Naohiko Baba & Masakazu Inada, 2007. "Price Discovery of Credit Spreads for Japanese Mega-Banks: Subordinated Bond and CDS," IMES Discussion Paper Series 07-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    7. David Grigorian & Vlad Manole, 2017. "Sovereign risk and deposit dynamics: evidence from Europe," Applied Economics, Taylor & Francis Journals, vol. 49(29), pages 2851-2860, June.
    8. Uchida, Hirofumi & Satake, Mitsuhiko, 2009. "Market discipline and bank efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 792-802, December.
    9. Baba, Naohiko & Inada, Masakazu, 2009. "Why do Japanese regional banks issue subordinated debts?," Japan and the World Economy, Elsevier, vol. 21(4), pages 358-364, December.
    10. Baba, Naohiko & Inada, Masakazu, 2009. "Price discovery of subordinated credit spreads for Japanese mega-banks: Evidence from bond and credit default swap markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 616-632, October.
    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. Elyasiani, Elyas & Keegan, Jason, 2017. "Market Discipline in the Secondary Bond Market: The Case of Systemically Important Banks," Working Papers 17-5, Federal Reserve Bank of Philadelphia.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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