Vol 2, No 4 (2014)
There should be NO CAP on the Amount of Subordinated Debt: William Poole is Right!
Khaled Elkhal, Sudesh Mujumdar
Abstract
Market discipline in the context of regulatory supervision of banks could be achieved by mandating banks to issue a minimum amount of subordinated debt to the public. Recent studies, however, argue that increased levels of subordinated debt may lead to increased risk-taking by banks, thus undermining the disciplinary function of such debt instruments. These studies, then, call for imposing an upper limit on the amount of subordinated debt that can be held. So, should there be such an upper limit? This paper lays out and analyzes a model that addresses this question. The analysis reveals that subordinated debt as an instrument of market discipline is only useful under relatively large amounts of debt. This finding furnishes theoretical support for a recent proposal by William Poole (former chief executive of the Federal Reserve Bank of St. Louis) on how subordinated debt can be made to serve as a 'disciplinary device'.
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Keywords
Subordinated Debt; Market Discipline; Bank Supervision; Risk Exposure
Publication information
Volume 2, Issue 4
Year of Publication: 2014
ISSN: 1857 - 8721
Publisher: EDNOTERA
How to cite
Elkhal, K., Mujumdar, S. (2014). There should be NO CAP on the Amount of Subordinated Debt: William Poole is Right!. Journal of Applied Economics and Business, Vol 2, No. 4, 75-80.