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The Market-Discipline Effects of Subordinated Debt: Enhanced US Commercial Banking-Sector Efficiency and Stability

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DOI: 10.4236/jfrm.2014.33009    2,740 Downloads   3,619 Views   Citations


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.

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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.

Conflicts of Interest

The authors declare no conflicts of interest.


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