Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?

By D. Hancock, M. Kwast. 2001

143 citations recorded by the source corpus.

Although accurate bond prices are difficult to come by, many have advocated that bank supervisors use subordinated debt spreads in the surveillance of large banking organizations. Our findings indicate that subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e., those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results further support and provide additional guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/6295285808f3452aa7f43da258c993583557d002

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Citations in the corpus

Who Disciplines Bank Managers? (2009, unknown): “…a tool to limit the risk of costly bank failures (e.g., Park and Peristiani, 1998; Flannery, 1998; Berger, Davies, and Flannery, 2000; Shadow Financial Regulatory Committee, 2000; Bliss; 2001; Hancock and Kwast, 2001; Martinez Peria and Schmukler, 2001; Maechler and McDill, 2006; Ashcraft, 2008).”
Incorporating Equity Market Information into Supervisory Monitoring Models (2001, methodology): “Examples of this research include Bliss and Flannery (2001), DeYoung et al. (2001), Evanoff and Wall (2000), Flannery and Sorescu (1996), Hancock and Kwast (2000) as well as the Board of Governors (1999).”
Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues (2000, unknown): “Hancock and Kwast (2001) found that subordinated debt spreads are most consistent across sources for the most liquid bond issues.”
Banking crises and market discipline: International evidence (2012, background): “As a consequence, depositors may be more relaxed if a new banking crisis occurs and have fewer incentives to exercise discipline (Honohan and Klingebiel, 2003). Empirical evidence is not conclusive. Martinez Peria and Schmukler (2001) find in Argentina, Chile, and Mexico during the 1980s and 1990s t”
The Three Pillars of Basel II, Optimizing the Mix (2004, background): “We will not discuss in detail the enormous literature on the Basel Accord and its relation with the “credit crunch” (good discussions can be found in Thakor (1996), Jackson et al. (1999), Santos (2000)).”