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The disciplinary effect of subordinated debt on bank risk taking

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  • Nguyen, Tu

Abstract

Using data for publicly listed commercial banks and bank holding companies around the world, I investigate the disciplinary effect of subordinated debt on bank risk taking in the period 2002–2008. In addition, I examine whether this effect depends on national bank regulations and legal and institutional conditions. I provide evidence that subordinated debt has a mitigating effect on bank risk taking. Further, the results suggest a threshold level of national bank regulations and economic development above which subordinated debt mitigates risk taking. Overall, the evidence supports the efficacy of proposals calling for increased use of subordinated debt in banking firms.

Suggested Citation

  • Nguyen, Tu, 2013. "The disciplinary effect of subordinated debt on bank risk taking," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 117-141.
    • Handle: RePEc:eee:empfin:v:23:y:2013:i:c:p:117-141
    DOI: 10.1016/j.jempfin.2013.05.005
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    Cited by:

    1. Cameron Haworth & Liam Gillies & Tobias Irrcher, 2018. "Measuring Market Discipline in New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2018/07, Reserve Bank of New Zealand.
    2. Heller, Yuval & Peleg Lazar, Sharon & Raviv, Alon, 2022. "Banks’ risk taking and creditors’ bargaining power," Journal of Corporate Finance, Elsevier, vol. 74(C).
    3. Lee, Kevin K. & Miller, Scott A., 2020. "Did covenants distort risk signals from bank subordinated debt yields before the financial crisis?," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-344, May.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Is the 2007 US Sub-Prime Financial Crisis So Different?: An International Historical Comparison," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(3), pages 291-299.
    6. Li, Shanshan & Gong, Di & Lu, Liping, 2024. "Bail-ins and market discipline: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 51-68.
    7. Bouvatier, Vincent & Lepetit, Laetitia & Rehault, Pierre-Nicolas & Strobel, Frank, 2023. "Time-varying Z-score measures for bank insolvency risk: Best practice," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 170-179.
    8. Heller, Yuval & Peleg-Lazar, Sharon & Raviv, Alon, 2019. "A closed-form solution to the risk-taking motivation of subordinated debtholders," Economics Letters, Elsevier, vol. 181(C), pages 169-173.
    9. Lei Zhao, 2018. "Market†based estimates of implicit government guarantees in European financial institutions," European Financial Management, European Financial Management Association, vol. 24(1), pages 79-112, January.
    10. Saad Alsunbul & Basim Alzugaiby & Sajid Chaudhry & Rhada Boujlil, 2024. "The fatter the tail, the shorter the sail," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 331-380, March.
    11. Ke, Konglin & Xu, Wanting & He, Yujie, 2024. "Do regulatory penalties reduce risk-taking of banks?," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    12. Thaer Alhalabi & Vítor Castro & Justine Wood, 2023. "Bank dividend payout policy and debt seniority: Evidence from US Banks," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 32(5), pages 285-340, December.

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    More about this item

    Keywords

    Financial crises; Bank regulation; Corporate governance; Market discipline; Subordinated debt;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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