Get access
Advertisement

Monitoring and Controlling Bank Risk: Does Risky Debt Help?

Authors

  • C. N. V. KRISHNAN,

    1. 1Weatherhead School of Management, Case Western Reserve University
    Search for more papers by this author
  • P. H. RITCHKEN,

    1. 1Weatherhead School of Management, Case Western Reserve University
    Search for more papers by this author
  • J. B. THOMSON

    1. 2Federal Reserve Bank, Cleveland
    Search for more papers by this author
    • Krishnan and Ritchken are from the Weatherhead School of Management, Case Western Reserve University. Thomson is at the Federal Reserve Bank, ClevelandThe authors gratefully acknowledge the suggestions of Rob Bliss, Ben Craig, Mark Flannery, Haluk Unal, Larry Wall, and especially the referee. We also acknowledge the research assistance of Faisal Butt and Wei Wei. Peter Ritchken acknowledges financial support from the Federal Reserve Bank of Cleveland. The opinions expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.


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.

Get access to the full text of this article

Ancillary