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Getting the most out of a mandatory subordinated debt requirement

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  • Rong Fan
  • Joseph G. Haubrich
  • Peter H. Ritchken
  • James B. Thomson

Abstract

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.\"

Suggested Citation

  • Rong Fan & Joseph G. Haubrich & Peter H. Ritchken & James B. Thomson, 2002. "Getting the most out of a mandatory subordinated debt requirement," Working Papers (Old Series) 0214, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0214
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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. Dilip Madan & George Pennacchi, 2003. "Introduction: Special Issue on Pricing the Risks of Deposit Insurance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(2), pages 89-92, October.
    3. Yehning Chen & Iftekhar Hasan, 2011. "Subordinated Debt, Market Discipline, and Bank Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1043-1072, September.
    4. Landskroner, Yoram & Paroush, Jacob, 2008. "Bank management and market discipline," Journal of Economics and Business, Elsevier, vol. 60(5), pages 395-414.
    5. Pablos Nuevo, Irene, 2019. "Has the new bail-in framework increased the yield spread between subordinated and senior bonds?," Working Paper Series 2317, European Central Bank.
    6. Lindstrom, Ryan & Osborne, Matthew, 2020. "Has bail-in increased market discipline? An empirical investigation of European banks’ credit spreads," Bank of England working papers 887, Bank of England.
    7. Maurizio Rocca & Neha Neha & Tiziana Rocca, 2020. "Female management, overconfidence and debt maturity: European evidence," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(3), pages 713-747, September.
    8. Tarr, David G., 2010. "The political, regulatory and market failures that caused the US financial crisis," Policy Research Working Paper Series 5324, The World Bank.
    9. Guo, Lin & Prezas, Alexandros P., 2019. "Market monitoring and influence: evidence from deposit pricing and liability composition from 1986 to 2013," Journal of Financial Stability, Elsevier, vol. 43(C), pages 146-166.
    10. Urs W. Birchler & Matteo Facchinetti, 2007. "Can Bank Supervisors Rely on Market Data? A Critical Assessment from a Swiss Perspective," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(II), pages 95-132, June.

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