Market discipline and subordinated debt
Distinguin, Isabelle
Market discipline and subordinated debt - 2019.
69
We construct a theoretical model to analyse the impact of bank opacity and the credibility of no bail-out policies on the effectiveness of market discipline exerted by subordinated debt holders. We find that for the most opaque banks, for banks perceived as too-big-to-fail and in periods of high uncertainty like in crisis, mandatory subordinated debt can be counterproductive and lead to lower monitoring. To ensure the effectiveness of market discipline, regulators should impose more transparency and ensure that subordinated debt holders are at risk. For this purpose, we argue that contingent capital might be an effective instrument.
Market discipline and subordinated debt - 2019.
69
We construct a theoretical model to analyse the impact of bank opacity and the credibility of no bail-out policies on the effectiveness of market discipline exerted by subordinated debt holders. We find that for the most opaque banks, for banks perceived as too-big-to-fail and in periods of high uncertainty like in crisis, mandatory subordinated debt can be counterproductive and lead to lower monitoring. To ensure the effectiveness of market discipline, regulators should impose more transparency and ensure that subordinated debt holders are at risk. For this purpose, we argue that contingent capital might be an effective instrument.
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