Sub-Debt Yield Spreads as Bank Risk Measures

Posted: 5 Nov 2001  

Douglas D. Evanoff

Federal Reserve Bank of Chicago

Larry D. Wall

Federal Reserve Bank of Atlanta - Research Department

Multiple version iconThere are 2 versions of this paper

Abstract

Several recent studies have recommended greater reliance on subordinated debt as a tool to discipline bank risk taking. Some of these proposals recommend using sub-debt yield spreads as triggers for supervisory discipline under prompt corrective action (PCA). Currently such action is prompted by capital adequacy measures. This paper provides the first empirical analysis of the relative accuracy of various capital ratios and sub-debt spreads in predicting bank condition, measured as subsequent CAMEL or BOPEC ratings. The results suggest that some of the capital ratios, including the summary measure used to trigger PCA, have almost no predictive power. Sub-debt yield spreads performed slightly better than the best capital measure, the Tier-1 leverage ratio, albeit the difference is not significant. The performance of sub-debt yields satisfies an important prerequisite for using sub-debt as a PCA trigger. However, the prediction errors are relatively high and further work to refine the measures would be desirable.

Keywords: bank regulation, subordinated debt, capital adequacy, prompt corrective action

JEL Classification: G28, G21, G14, K23

Suggested Citation

Evanoff, Douglas D. and Wall, Larry D., Sub-Debt Yield Spreads as Bank Risk Measures. Journal of Financial Services Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=288567

Douglas D. Evanoff

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-5814 (Phone)

Larry D. Wall (Contact Author)

Federal Reserve Bank of Atlanta - Research Department ( email )

1000 Peachtree Street, NE
Atlanta, GA 30309-4470
United States
404-498-8937 (Phone)
404-498-8956 (Fax)

HOME PAGE: http://www.frbatlanta.org/econ_rd/bios/wall.htm

Paper statistics

Abstract Views
538