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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Using Subordinated Debt to Monitor Bank Holding Companies: Is it Feasible?
Diana Hancock and Myron L. Kwast

Abstract: Much research is needed to implement a supervisory surveillance system for banking organizations that relies on subordinated debt and other market data. This paper is germane to that task. We find subordinated debt spreads are most consistent across data sources for the most liquid bonds (i.e., those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find there is a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results support and provide guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.

Keywords: Bonds, subordinated debt, bank holding companies, monitoring, data quality

Full paper (1134 KB PDF)

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Last update: May 1, 2001