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Subordinated Debt and the Quality of Market Discipline in Banking
| Content Provider | Semantic Scholar |
|---|---|
| Author | Levonian, Mark E. |
| Copyright Year | 2001 |
| Abstract | Subordinated debt is compared to common equity as a source of market discipline in banking. The debt issued by a bank is modeled as a contingent claim on the bank's assets. The model highlights the effects of moral hazard and market discipline, and shows how market pricing of subordinated-debt transforms the risk-taking incentives facing bank shareholders. The effects on both the deposit guaranty liability and the probability of bank failure are examined. The conclusions from the model are that subordinated debt has few advantages over equity, either as a form of bank capital or as a source of market discipline; indeed, in some important regards it is distinctly inferior. With regard to the potential information content of subordinated-debt prices, the model illustrates that the same information is available from stock prices, although subordinated-debt market data could be complementary. Views expressed are my own, not those of the Federal Reserve Bank of San Francisco or any other part of the Federal Reserve System. I was significantly influenced by comments from Robert Bliss, Dan Covitz, Arturo Estrella, Fred Furlong, Simon Kwan, Todd Liljegren, and Jose Lopez, although I hold them blameless for any errors and absolve them from all responsibility for the conclusions. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://www.bis.org/bcbs/events/oslo/levonian.pdf |
| Alternate Webpage(s) | http://www.bis.org/bcbs/events/oslo/levonian.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
