Getting the Most Out of a Mandatory Subordinated Debt Requirement

36 Pages Posted: 27 Apr 2002 Last revised: 18 Nov 2007

See all articles by Rong Fan

Rong Fan

Gifford Fong Associates

Joseph G. Haubrich

Federal Reserve Bank of Cleveland

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

James B. Thomson

University of Akron

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2002

Abstract

Recent advances in asset pricing - the reduced form approach to pricing risk 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 non-risk 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.

Keywords: subordinated debt, banks, asset pricing

JEL Classification: G21, G28, G38

Suggested Citation

Fan, Rong and Haubrich, Joseph G. and Ritchken, Peter H. and Thomson, James B., Getting the Most Out of a Mandatory Subordinated Debt Requirement (June 4, 2002). FRB of Cleveland Working Paper No. 02-14. Available at SSRN: https://ssrn.com/abstract=306979 or http://dx.doi.org/10.2139/ssrn.306979

Rong Fan

Gifford Fong Associates ( email )

3658 Mt. Diablo Blvd.
Suite 200
Lafayette, CA 94549
United States
925-299-7800 (Phone)

Joseph G. Haubrich (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216-579-2802 (Phone)
216-579-3050 (Fax)

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3849 (Phone)
216-368-4776 (Fax)

James B. Thomson

University of Akron ( email )

Akron, OH 44325-4803
United States

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