Subordinated debt and prompt corrective regulatory action
Several recent studies have recommended greater reliance on subordinated debt as a tool to discipline bank risk taking. Some of these proposals recommend using subordinated debt yield spreads as additional triggers for supervisory discipline under prompt corrective action (PCA), action that is currently prompted by capital adequacy measures. This paper provides a theoretical model describing how use of a second market-measure of bank risk, in addition to the supervisors’ own internalized information, could improve bank discipline. The authors then empirically evaluate the implications of the model. The evidence suggests that subordinated debt spreads dominate the current capital measures used to trigger PCA and consideration should be given to using spreads to complement supervisory discipline. The evidence also suggests that spreads over corporate bonds may be preferred to using spreads over U.S. Treasuries.
|Date of creation:||2002|
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- 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.
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- Douglas D. Evanoff & Larry D. Wall, 2000.
"Subordinated debt and bank capital reform,"
Working Paper Series
WP-00-7, Federal Reserve Bank of Chicago.
- Diana Hancock & Myron L. Kwast, 2001.
"Using subordinated debt to monitor bank holding companies: is it feasible?,"
Finance and Economics Discussion Series
2001-22, Board of Governors of the Federal Reserve System (U.S.).
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"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;Western Finance Association, vol. 20(2), pages 233-266, October.
- Andrea Sironi, 2000. "An analysis of European banks SND issues and its implications for the design of a mandatory subordinated debt policy," Finance and Economics Discussion Series 2000-41, Board of Governors of the Federal Reserve System (U.S.).
- Mark Flannery, 2001. "The Faces of “Market Discipline”," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 107-119, October.
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- Evanoff, Douglas D. & Wall, Larry D., 2002.
"Measures of the riskiness of banking organizations: Subordinated debt yields, risk-based capital, and examination ratings,"
Journal of Banking & Finance,
Elsevier, vol. 26(5), pages 989-1009, May.
- Douglas D. Evanoff & Larry D. Wall, 2001. "Measures of the riskiness of banking organizations: Subordinated debt yields, risk-based capital, and examination ratings," FRB Atlanta Working Paper 2001-25, Federal Reserve Bank of Atlanta.
- Jeffery W. Gunther & Mark E. Levonian & Robert R. Moore, 2001. "Can the stock market tell bank supervisors anything they don't already know?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 2-9.
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