Subordinated Debt, Market Discipline, and Bank Risk
Journal
Journal of Money, Credit and Banking
Journal Volume
43
Journal Issue
6
Pages
1043
Date Issued
2011-09-01
Author(s)
Hasan, Iftekhar
Abstract
This paper demonstrates that subordinated debt (subdebt thereafter) regulation can be an effective mechanism for disciplining banks. By reducing the chance that managers of distressed banks can take value-destroying actions to benefit themselves, subdebt regulation may encourage banks to lower asset risk. Moreover, subdebt regulation and bank capital requirements can be complements for alleviating the banks' moral hazard problems. To make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require subdebt to convert into the issuing bank's equity when the government provides assistance to the bank. © 2011 The Ohio State University.
Subjects
Bank capital regulation | Contingent capital certificate | G21 | G28 | Market discipline | Moral hazard | Subordinated debt regulation
Publisher
WILEY-BLACKWELL
Type
journal article