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Monitoring and Controlling Bank Risk: Does Risky Debt Help?
Author(s) -
KRISHNAN C. N. V.,
RITCHKEN P. H.,
THOMSON J. B.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00732.x
Subject(s) - debt , market liquidity , credit risk , monetary economics , business , liquidity risk , market discipline , control (management) , financial system , sample (material) , economics , actuarial science , finance , chemistry , management , chromatography
We examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk taking. To evaluate whether subordinated debt enhances risk monitoring, we extract the credit‐spread curve for each banking firm in our sample and examine whether changes in credit spreads reflect changes in bank risk variables, after controlling for changes in market and liquidity variables. We do not find strong and consistent evidence that they do. To evaluate whether subordinated debt controls risk taking, we examine whether the first issue of subordinated debt changes the risk‐taking behavior of a bank. We find that it does not.