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Enhancing market discipline in banking : The role of subordinated debt in financial regulatory reform
| Content Provider | Semantic Scholar |
|---|---|
| Author | Evanoffa, Douglas D. Jagtianib, Julapa A. Nakatac, Taisuke |
| Copyright Year | 2015 |
| Abstract | The increasing complexity of large financial firms has led to consideration of alternative regulatory structures. This has intensified recently because of the worldwide turmoil in financial markets. One important consideration has been to increase reliance on market discipline—most notably, increased reliance on subordinated debt (sub-debt) in the bank capital structure to discipline banks’ risk taking. This proposal, however, has been subject to criticism related to the quality of the signal generated in current sub-debt markets. We argue that previous studies evaluating the potential usefulness of sub-debt proposals have evaluated sub-debt spreads in a very different environment from that characterized by a fully implemented sub-debt program, where the market will become deeper, issuance will be more frequent, debt will be viewed as a more viable means to raise capital, bond dealers will be less reluctant to publicly disclose more details on debt transactions, and generally, the market will be more closely followed. As a test to see how the quality of the signal may change, we evaluate the riskspread relationship—accounting for the enhanced liquidity and market transparency surrounding new debt issues. Our empirical The authors acknowledge helpful comments on earlier drafts from an anonymous referee, Dan Covitz, Ray DeGennaro, Fred Furlong, Joel Houston, Simon Kwan, Jose Lopez, Mitchell Petersen, Larry Wall, and participants at the FDIC’s conference on “Risk Transfer and Governance in the Financial System,” the Financial Management Association European conference in Zurich, Switzerland, the Federal Reserve System Committee on Financial Structure Meeting, and the Western Economic Association conference. We also thank Carlos Gutierres, Loretta Kujawa, Lauren Gaudino and George Simler for dedicated research assistance. The views expressed are those of the authors and may not be shared by others including the Federal Reserve Bank of Chicago, the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or any of the above-mentioned reviewers. ∗ Corresponding author. Tel.: +1 215 574 7284. E-mail address: Julapa.Jagtiani@phil.frb.org (J.A. Jagtiani). 0148-6195/$ – see front matter © 2010 Published by Elsevier Inc. doi:10.1016/j.jeconbus.2010.07.001 2 D.D. Evanoff et al. / Journal of Economics and Business 63 (2011) 1–22 results indicate a superior risk-spread relationship surrounding the period of new debt issuance due, we posit, to greater liquidity and transparency. Our results overall suggest that the degree of market discipline would be significantly enhanced by a mandatory subdebt program, thus suggesting a potential role for sub-debt in the banking regulatory reform. © 2010 Published by Elsevier Inc. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://isiarticles.com/bundles/Article/pre/pdf/5209.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Email Fred (chatterbot) Furlong Julius Petersen Like button Mandatory - HL7DefinedRoseProperty Salvia miltiorrhiza Scientific Publication Switzerland Technical debt |
| Content Type | Text |
| Resource Type | Article |
