Requiring banks to issue subordinated debt is one proposal to bring market discipline to bear in aiding regulatory supervision. This article explores the frictions that produce a need for discipline (agency problems) and the mechanisms markets have evolved for dealing with these frictions....

Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders' ability to accurately assess the condition of a firm ("monitoring")...

Are banks that fail in banking panics the riskiest ones prior to the panics? The free banking era in the United States provides useful data to examine this question because the assets held by the banks were traded at the New York Stock Exchange. The authors estimate the ex ante riskiness of a...

Recently there have been a number of recommendations to increase the role of subordinated debt (SND) in satisfying bank capital requirements as a preferred means to discipline the risk-taking behavior of systemically important banks. One such proposal recommended using SND yield spreads as the...

Stress testing has recently become a critical risk management and capital planning tool for large financial institutions and their supervisors around the world. However, the one prior U.S. experience tying stress test results to capital requirements was a spectacular failure: the Office of...

Although financial instruments that, in effect, permit corporations to treat preferred stock dividends as tax-deductible interest have been used by nonfinancial corporations since late 1993, bank holding companies (BHCs) did not issue these trust-preferred securities (TPS) until 1996, when the...

Several recent studies have recommended greater reliance on subordinated debt as a tool to discipline bank risk taking. Some of these proposals recommend using subordinated debt yield spreads as additional triggers for supervisory discipline under prompt corrective action (PCA), action that is...