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Bank Capital Standards and Subordinated Debt Prices

Advances in Pacific Basin Business Economics and Finance

ISBN: 978-1-78743-410-3, eISBN: 978-1-78743-409-7

Publication date: 15 September 2017

Abstract

This study develops a multi-period structural model to value bank subordinated debt (subdebt) under different regulatory policies. The model provides a complete framework for analyzing how various factors, such as credit and interest rate risks, bank characteristics, and regulatory policies, affect subdebt prices and yield spreads. It finds that the implementation of Prompt Corrective Action (PCA) will raise subdebt prices and lower subdebt spreads, while capital forbearance will have the opposite effects. Also, subdebt spreads are less sensitive to bank risk when PCA is imposed than when capital forbearance occurs. The results of the paper suggest that enhancing market discipline through giving subdebt investors more rights to force timely reorganization of weak banks will reduce the subdebt spreads required by investors.

Keywords

Citation

Lee, J.-P., Lin, E.M.H., Yu, M.-T. and Zhao, Y. (2017), "Bank Capital Standards and Subordinated Debt Prices", Advances in Pacific Basin Business Economics and Finance (Advances in Pacific Basin Business, Economics and Finance, Vol. 5), Emerald Publishing Limited, Leeds, pp. 77-99. https://doi.org/10.1108/S2514-465020170000001004

Publisher

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Emerald Publishing Limited

Copyright © 2017 Emerald Publishing Limited