Monitoring and Controlling Bank Risk: Does Risky Debt Serve Any Purpose?

Topics:
Commercial Lending
Tags:
Bank,
Federal Reserve Bank Of Cleveland,
Financial Services,
Monitoring
Source:
Federal Reserve Bank of Cleveland

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Overview: To examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk-taking, the paper extracts the credit-spread curve for each banking firm in their sample. After controlling for changes in market and liquidity variables, they find that changes in credit spreads do not reflect changes in bank risk variables. The result is robust to firm type, examination rating, size, leverage, and profitability, as well as to different model specifications. They also find that issuing subordinated debt does not alter banks' risk-taking behavior.

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Format: PDF | Size: 2,140KB | Date: May 2003 | Pages: 49

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