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Getting the most out of a mandatory subordinated debt requirement

  • Rong Fan
  • Joseph G. Haubrich
  • Peter H. Ritchken
  • James B. 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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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0214.

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Date of creation: 2002
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Handle: RePEc:fip:fedcwp:0214
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