TITLE:
The Market-Discipline Effects of Subordinated Debt: Enhanced US Commercial Banking-Sector Efficiency and Stability
AUTHORS:
Sang-Ook Shin, Hong-Ghi Min, Judith A. McDonald
KEYWORDS:
Subordinated Debt, Market Discipline, Banking-Sector’s Efficiency, Stability, Non-Performing Loans, US Commercial Banks
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.3 No.3,
September
10,
2014
ABSTRACT: Using US commercial bank data over the period 2000 to 2008, we examine how the issuance of subordinated debt (SND) affects bank risk-taking and stability, efficiency, and deposit and loan growth rates. We identify the channels by which these effects occur and, using fixed- and random-effects models and system-GMM estimations, we provide evidence that supports these channels. As SND as a percentage of total liabilities rises, bank risk-taking falls. SNDs not only improve banks’ market discipline by directly reducing non-performing loans, but by leading to reduced overhead costs, and SNDs also boost banks’ efficiency and stability. Our results are robust under different model specifications and estimation methodologies.