Getting the Most Out of a Mandatory Subordinated Debt Requirement

Posted: 17 Feb 2004

See all articles by Rong Fan

Rong Fan

Gifford Fong Associates

Joseph G. Haubrich

Federal Reserve Bank of Cleveland

James B. Thomson

University of Akron

Peter H. Ritchken

Case Western Reserve University - Department of Banking & Finance

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Abstract

Recent advances in asset pricing - the reduced-form approach to pricing risky 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 nonrisk 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

Suggested Citation

Fan, Rong and Haubrich, Joseph G. and Thomson, James B. and Ritchken, Peter H., Getting the Most Out of a Mandatory Subordinated Debt Requirement. Journal of Financial Services Research, Vol. 24, No. 2-3, pp. 149-179. Available at SSRN: https://ssrn.com/abstract=502603

Rong Fan (Contact Author)

Gifford Fong Associates ( email )

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

Joseph G. Haubrich

Federal Reserve Bank of Cleveland ( email )

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

James B. Thomson

University of Akron ( email )

Akron, OH 44325-4803
United States

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)

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