Monitoring and Controlling Bank Risk : Does Risky Debt Serve Any Purpose?

Examines whether mandating banks to issue subordinated debt (SD) would serve to enhance market monitoring & control risk taking (RT). The authors extract the credit-spread curve for each banking firm in their sample & examine whether changes in credit spreads reflect changes in bank risk variables, after controlling for changes in market & liquidity. They find that they do not. Their result is robust to firm type, exam'n. rating, size, leverage & profitability, as well as to diff. model spec's. To evaluate whether SD controls RT, they examined whether issuing SD changes the RT behavior of a bank. They find that it does not. Therefore, a mandatory SD requirement for banks is unlikely to provide the purported benefits of enhancing risk monitoring or controlling RT.Krishman, C. N. V. is the author of 'Monitoring and Controlling Bank Risk : Does Risky Debt Serve Any Purpose?', published 2003 under ISBN 9780756737795 and ISBN 0756737796.