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Getting the Most Out of a Mandatory Subordinated Debt Requirement

  • Rong Fan
  • Joseph Haubrich
  • Peter Ritchken
  • James Thomson

Recent advances in asset pricing-the reduced-form approach to pricing risky debt and derivatives-are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. The authors find that credit spreads on both fixed- and floating-rate subordinated debt provide relatively clean signals of bank risk and are not unduly influenced by non-risk factors. Fixed-rate debt with a put is unacceptable, but making the putable debt floating resolves most problems. The authors' approach also helps to clarify several different notions of "bank risk."

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File URL: http://hdl.handle.net/10.1023/B:FINA.0000003321.05468.7d
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Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 24 (2003)
Issue (Month): 2 (October)
Pages: 149-179

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Handle: RePEc:kap:jfsres:v:24:y:2003:i:2:p:149-179
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102934

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