Getting the Most Out of a Mandatory Subordinated Debt Requirement

Recent advances in asset pricing - the reduced-form approach to pricing risky debt and derivatives - are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed- and floating-rate subordinated debt provide relatively...

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Bibliographic Details
Published inJournal of financial services research Vol. 24; no. 2; pp. 149 - 179
Main Authors Thomson, James B, Ritchken, Peter, Fan, Rong, Haubrich, Joseph
Format Journal Article
LanguageEnglish
Published Dordrecht Springer 01.10.2003
Springer Nature B.V
SeriesJournal of Financial Services Research
Subjects
asset pricing
Banking industry
banks
Capital requirements
Corporate debt
Credit
Debt
Derivatives
Finance
Financial services
Financial Services Modernization Act 1999-US
Insurance
Interest rates
Mathematical models
Pricing
Pricing policies
Proposals
Recapitalization
Risk
Spread
Studies
Subordinated debt
Supervisors
Treasuries
United States > US
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Summary:Recent advances in asset pricing - the reduced-form approach to pricing risky debt and derivatives - are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed- and floating-rate subordinated debt provide relatively clean signals of bank risk and are not unduly influenced by nonrisk factors. Fixed-rate debt with a put is unacceptable, but making the putable debt floating resolves most problems. Our approach also helps to clarify several different notions of "bank risk." [PUBLICATION ABSTRACT]
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0920-8550
1573-0735
DOI:10.1023/b:fina.0000003321.05468.7d