Subordinated Debt and Prompt Corrective Regulatory Action

Forthcoming in Research in Financial Services Series: Private and Public Policy

Posted: 27 Jan 2003

See all articles by Douglas D. Evanoff

Douglas D. Evanoff

Federal Reserve Bank of Chicago

Larry D. Wall

Federal Reserve Bank of Atlanta - Research Department

Multiple version iconThere are 2 versions of this paper

Abstract

Several recent studies have recommended greater reliance on subordinated debt as a tool to discipline bank risk taking. Some of these proposals recommend using subordinated debt yield spreads as additional triggers for supervisory discipline under prompt corrective action (PCA), action that is currently prompted by capital adequacy measures. This paper provides a theoretical model describing how use of a second market-measure of bank risk, in addition to the supervisors' own internalized information, could improve bank discipline. The authors then empirically evaluate the implications of the model. The evidence suggests that subordinated debt spreads dominate the current capital measures used to trigger PCA and consideration should be given to using spreads to complement supervisory discipline. The evidence also suggests that spreads over corporate bonds may be preferred to using spreads over U.S. Treasuries.

Keywords: Bank regulation, subordinated debt, capital adequacy, prompt corrective action

JEL Classification: G2, G3, L5

Suggested Citation

Evanoff, Douglas D. and Wall, Larry D., Subordinated Debt and Prompt Corrective Regulatory Action. Forthcoming in Research in Financial Services Series: Private and Public Policy, Available at SSRN: https://ssrn.com/abstract=367102

Douglas D. Evanoff

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5814 (Phone)

Larry D. Wall (Contact Author)

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8937 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.frbatlanta.org/econ_rd/bios/wall.htm

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