Research ArticleOpen AccessGoogle Scholar indexed
Market Discipline of Subordinated Debt: Empirical Evidence from Japanese Commercial Banks
Busan Development Institute, Busan, Republic of Korea
Department of Management Science, Korea Advanced Institute of Science and Technology, Daejeon, Republic of Korea
- 1 Busan Development Institute, Busan, Republic of Korea
- 2 Department of Management Science, Korea Advanced Institute of Science and Technology, Daejeon, Republic of Korea
Journal of Financial Risk Management·Volume 02 (2013)·Pages 38–42·Published 5 June 2013·DOI10.4236/jfrm.2013.22006
Copy link · social · email
Abstract
We investigate if Subordinated Note and Debenture (SND) holders make banks to take less risk by analyzing balance sheet data of Japanese commercial banks. The cross-section regression shows that banks take less risk as the amount of SNDs increase. Specifically, it is shown that the loan risk measure (the ratio of impaired loans to the total loans) and the stock investment risk measure (the invested stocks over bank capital) have decreased with the increase of SND amounts. These results provide evidence that SNDs are effective instrument for the market discipline.
KeywordsMarket DisciplineSubordinated DebtJapanese Commercial BanksLoan RiskStock Investment Risk
- Basel II (2004). Basel II: International convergence of capital measurement and capital standards: A revised framework. Geneva: Basel Committee Publications.
- Chen, A. H., Robinson, K. J., & Siems, T. F. (2004). The wealth effects from a subordinated debt policy: Evidence from passage of the Gramm-Leach-Bliley Act. Review of Financial Economics, 13, 103 119. doi:10.1016/S1058-3300(03)00025-9
- Evanoff, D. D., & Wall, L. D. (2001). Sub-debt Yield Spreads as Bank Risk Measures. Financial Services Research, 20, 121-145. doi:10.1023/A:1012408023269
- Evanoff, D. D., & Wall, L. D. (2002). Measures of the riskiness of banking organizations: Subordinated debt yields, risk-based capital, and examination ratings. Journal of Banking and Finance, 26, 989 1009. doi:10.1016/S0378-4266(01)00270-9
- Goyal, V. K. (2005). Market discipline of bank risk: Evidence from subordinated debt contracts. Journal of Financial Intermediation, 14, 318-350. doi:10.1016/j.jfi.2004.06.002
- Hamalainen, P. (2004). Mandatory subordinated debt and the corporate governance of banks. Corporate Governance: An International Review, 12, 93-106. doi:10.1111/j.1467-8683.2004.00346.x
- Hamalainen, P., Hall, M., & Howcroft, B. (2005). A framework for market discipline in bank regulatory design. Journal of Business Finance & Accounting, 32, 183-209. doi:10.1111/j.0306-686X.2005.00592.x
- Jagtiani, J., & Lemieux, C. (2001). Market discipline prior to bank failure. Journal of Economics and Business, 53, 313-24. doi:10.1016/S0148-6195(00)00046-1
- Kane, E. J. (1987). Dangers of capital forbearance: The case of the FSLIC and “Zombie” S&Ls. Contemporary Economic Policy, 5, 77 83. doi:10.1111/j.1465-7287.1987.tb00247.x
- Krishnan, C. N. V., Ritchken, P. H., & Thomson, J. B. (2005). Monitoring and controlling bank risk: Does risky debt help? The Journal of Finance, 60, 343-378. doi:10.1111/j.1540-6261.2005.00732.x
- Lane, T. D. (1993). Market discipline. International Monetary Fund Staff Papers, 40, 53-88. doi:10.2307/3867377
- Nier, E., & Baumann, U. (2006). Market discipline, disclosure and moral hazard in banking. Journal of Financial Intermediation, 15, 332-361. doi:10.1016/j.jfi.2006.03.001
- Sironi, A. (2003). Testing for market discipline in the European banking industry: Evidence from subordinated debt issues. Journal of Money, Credit & Banking, 35, 443-473. doi:10.1353/mcb.2003.0022