Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?

51 Pages Posted: 4 May 2001

See all articles by Diana Hancock

Diana Hancock

Federal Reserve Board - Division of Research and Statistics

Myron L. Kwast

Federal Reserve Board - Division of Research & Statistics

Date Written: April 2001

Abstract

Much research is needed to implement a supervisory surveillance system for banking organizations that relies on subordinated debt and other market data. This paper is germane to that task. We find subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e., those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find there is a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results support and provide guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.

Keywords: Bonds, subordinated debt, bank holding companies, monitoring, data quality

JEL Classification: G21, G28

Suggested Citation

Hancock, Diana and Kwast, Myron L., Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible? (April 2001). FEDS Discussion Paper No. 2001-22. Available at SSRN: https://ssrn.com/abstract=268959 or http://dx.doi.org/10.2139/ssrn.268959

Diana Hancock (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3019 (Phone)
202-452-5295 (Fax)

Myron L. Kwast

Federal Reserve Board - Division of Research & Statistics

20th and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2909 (Phone)
202-452-3819 (Fax)

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