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Subordinated Debt and Market Discipline in Canada

Author

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  • Greg Caldwell

Abstract

The author documents the use by Canadian banks of subordinated debt (SD) as a capital instrument. He reviews the economic benefits of this asset as a mechanism for market discipline and highlights academic and policy research over the past 20 years. The author provides both qualitative and quantitative summaries of the current regulatory and market environment in Canada, and conducts a Tobit analysis of factors that affect a bank's decision to issue SD. He also constructs a cross-section time-series sample of banks, into which controls for fixed effects, along with other non-default risk factors, are incorporated. Results for domestic banks show that, whenever there exists a high degree of gross impaired non-mortgage loans and mortgage writeoffs relative to assets, banks are less likely to issue SD. In contrast, increases in past-due (but still unimpaired) non-mortgage loans have a positive effect on SD issuance. This suggests that domestic banks 'time' their issuance decisions to avoid market discipline.

Suggested Citation

  • Greg Caldwell, 2005. "Subordinated Debt and Market Discipline in Canada," Staff Working Papers 05-40, Bank of Canada.
    • Handle: RePEc:bca:bocawp:05-40
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    References listed on IDEAS

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    Cited by:

    1. Beyhaghi, Mehdi & D’Souza, Chris & Roberts, Gordon S., 2014. "Funding advantage and market discipline in the Canadian banking sector," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 396-410.
    2. Greg Caldwell, 2007. "Best Instruments for Market Discipline in Banking," Staff Working Papers 07-9, Bank of Canada.
    3. Schürk, Daniel, 2019. "Does Subordinated Debt Discipline Banks? Empirical Evidence of Market Discipline in Europe," Junior Management Science (JUMS), Junior Management Science e. V., vol. 4(2), pages 228-240.

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    More about this item

    Keywords

    Financial institutions;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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