Debt Priority Structure, Market Discipline and Bank Conduct
Review of Financial Studies (Forthcoming)
63 Pages Posted: 6 Sep 2017
Date Written: September 1, 2017
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: Suggested Citation