Monitoring and Controlling Bank Risk: Does Risky Debt Help?

44 Pages Posted: 8 Mar 2004

See all articles by C. N. V. Krishnan

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

James B. Thomson

University of Akron

Date Written: October 7, 2003

Abstract

We examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk taking. To evaluate whether subordinated debt enhances risk monitoring, we extract the credit-spread curve for each banking firm in our sample and examine whether changes in credit spreads reflect changes in bank risk variables, after controlling for changes in market and liquidity variables. We do not find strong and consistent evidence that they do. To evaluate whether subordinated debt controls risk taking, we examine whether the first issue of subordinated debt changes the risk-taking behavior of a bank. We find that it does not. We conclude that a mandatory subordinated debt requirement for banks is unlikely to provide the purported benefits of enhancing risk monitoring or controlling risk taking.

Keywords: Bank risk, Estimation of credit spread Curves, Determinants of credit spread changes

JEL Classification: G12, G21

Suggested Citation

Krishnan, C. N. V. and Ritchken, Peter H. and Thomson, James B., Monitoring and Controlling Bank Risk: Does Risky Debt Help? (October 7, 2003). AFA 2004 San Diego Meetings; FRB of Cleveland Working Paper No. 0301. Available at SSRN: https://ssrn.com/abstract=465181

C. N. V. Krishnan

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

10900 Euclid Ave.
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

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 (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

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