The Market-Discipline Effects of Subordinated Debt: Enhanced US Commercial Banking-Sector Efficiency and Stability

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Using US commercial bank data over the period 2000 to 2008, we examine how the issuance of subordinated debt (SND) affects bank risk-taking and stability, efficiency, and deposit and loan growth rates. We identify the channels by which these effects occur and, using fixed- and random-effects models and system-GMM estimations, we provide evidence that supports these channels. As SND as a percentage of total liabilities rises, bank risk-taking falls. SNDs not only improve banks’ market discipline by directly reducing non-performing loans, but by leading to reduced overhead costs, and SNDs also boost banks’ efficiency and stability. Our results are robust under different model specifications and estimation methodologies.
Publisher
Scientific Research Publishing Inc
Issue Date
2014-09
Language
English
Citation

Journal of Financial Risk Management, v.3, no.3, pp.78 - 95

ISSN
2167-9533
DOI
10.4236/jfrm.2014.33009
URI
http://hdl.handle.net/10203/199144
Appears in Collection
RIMS Journal Papers
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