Author(s)

Sang-Ook Shin, Hong-Ghi Min, Judith A. McDonald

Department of Management Science, KAIST 335 Gwahang-Ro, Yusong, Daejun, Republic of Korea.
Economics Department, Lehigh University, Bethlehem, PA, USA.
Texas A & M University, College Station, TX, USA.

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.

Subordinated Debt, Market Discipline, Banking-Sector’s Efficiency, Stability, Non-Performing Loans, US Commercial Banks

Shin, S. , Min, H. and McDonald, J. (2014) The Market-Discipline Effects of Subordinated Debt: Enhanced US Commercial Banking-Sector Efficiency and Stability. Journal of Financial Risk Management, 3, 78-95. doi: 10.4236/jfrm.2014.33009.