Debt Priority Structure, Market Discipline and Bank Conduct

Review of Financial Studies (Forthcoming)

63 Pages Posted: 6 Sep 2017

See all articles by Piotr Danisewicz

Piotr Danisewicz

University of Bristol

Danny McGowan

University of Birmingham

Enrico Onali

Nottingham University Business School

Klaus Schaeck

University of Bristol

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2017

Abstract

We examine how debt priority structure affects bank funding costs and soundness. Leveraging an unexplored natural experiment that changes the priority of claims on banks’ assets, we document asymmetric effects that are consistent with changes in monitoring intensity by various creditors depending on whether creditors move up or down the priority ladder. The enactment of depositor preference laws which confer priority on depositors reduces deposit rates but increases non-deposit rates. Importantly, subordinating non-depositor claims reduces bank risk-taking, consistent with market discipline. This insight highlights a role for debt priority structure in the regulatory framework.

Keywords: market discipline, debt priority structure, banking regulation, natural experiment

JEL Classification: G21, G28

Suggested Citation

Danisewicz, Piotr and McGowan, Danny and Onali, Enrico and Schaeck, Klaus, Debt Priority Structure, Market Discipline and Bank Conduct (September 1, 2017). Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3031357

Piotr Danisewicz

University of Bristol ( email )

School of Economics, Finance and Management
The Priory Road Complex
Bristol, BS8 1TU
United Kingdom

Danny McGowan

University of Birmingham ( email )

Department of Civil Engineering
Edgbaston, VT Birmingham B15 2TT
United Kingdom

Enrico Onali

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Klaus Schaeck (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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