Getting the Most Out of a Mandatory Subordinated Debt Requirement |
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Authors: | Rong Fan Joseph G Haubrich Peter Ritchken James B Thomson |
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Institution: | 1. Case Western Reserve University, USA 2. Federal Reserve Bank of Cleveland, USA
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Abstract: | Recent advances in asset pricing—the reduced-form approach to pricing risky debt and derivatives—are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed- and floating-rate subordinated debt provide relatively clean signals of bank risk and are not unduly influenced by nonrisk factors. Fixed-rate debt with a put is unacceptable, but making the putable debt floating resolves most problems. Our approach also helps to clarify several different notions of “bank risk.” |
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