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Working Paper

Getting the Most Out of a Mandatory Subordinated Debt Requirement

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Recent advances in asset pricing—the reduced-form approach to pricing risky debt and derivatives—are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. We find that credit spreads on both fixed and floating rate subordinated debt provide relatively clean signals of bank risk and are not unduly influenced by non-risk factors. Fixed rate debt with a put is unacceptable, but making the putable debt floating resolves most problems. Our approach also helps to clarify several different notions of "bank risk".
11.01.2002ISSN 2573-7953 WP 02-14DOI 10.26509/frbc-wp-200214
Keywords subordinated debt, banks, asset pricing
JEL Classification Codes G28, G12, G18

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Fan, Rong, Joseph G. Haubrich, Peter Ritchken, and James B. Thomson. 2002. “Getting the Most Out of a Mandatory Subordinated Debt Requirement.” Federal Reserve Bank of Cleveland, Working Paper No. 02-14. https://doi.org/10.26509/frbc-wp-200214