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Subordinated debt as instrument of market discipline: risk sensitivity of sub-debt yield spreads in UK banking

Subordinated debt as instrument of market discipline: risk sensitivity of sub-debt yield spreads in UK banking
Subordinated debt as instrument of market discipline: risk sensitivity of sub-debt yield spreads in UK banking
This paper empirically examines whether yield spreads of subordinated debt issued by UK banks are sensitive to bank risks, with a dataset that includes spreads, ratings, accounting measures of bank risks and market condition indexes in the sample period between 1997 and 2009. The results show that Moody's and S&P traditional ratings have significant and negative impacts on spreads, and investors have exercised sensible discrimination between different risk profiles of UK financial institutions. However, accounting measures show an absence of the explanatory power of the spreads. Market condition indicators, particularly those related to European markets, also have significant influence on credit yield spreads. The findings indicate that, in the UK, sub-debt spreads do reflect the issuing banks’ risk-taking, hence satisfying a critical precondition for sub-debts to be an instrument of market discipline in banking.
0148-6195
1-21
Zhang, Zhichao
7a646262-463c-4035-b69b-beb5586b3209
Song, Wei
0d91b8a3-694b-469e-a15e-bba82dc5d090
Sun, Xin
806d8a96-3b36-44a3-b87b-78cbc32e8759
Shi, Nan
c05ffbe2-416c-4271-ab97-1aa12b0310b9
Zhang, Zhichao
7a646262-463c-4035-b69b-beb5586b3209
Song, Wei
0d91b8a3-694b-469e-a15e-bba82dc5d090
Sun, Xin
806d8a96-3b36-44a3-b87b-78cbc32e8759
Shi, Nan
c05ffbe2-416c-4271-ab97-1aa12b0310b9

Zhang, Zhichao, Song, Wei, Sun, Xin and Shi, Nan (2014) Subordinated debt as instrument of market discipline: risk sensitivity of sub-debt yield spreads in UK banking. Journal of Economics and Business, 73, 1-21. (doi:10.1016/j.jeconbus.2013.11.002).

Record type: Article

Abstract

This paper empirically examines whether yield spreads of subordinated debt issued by UK banks are sensitive to bank risks, with a dataset that includes spreads, ratings, accounting measures of bank risks and market condition indexes in the sample period between 1997 and 2009. The results show that Moody's and S&P traditional ratings have significant and negative impacts on spreads, and investors have exercised sensible discrimination between different risk profiles of UK financial institutions. However, accounting measures show an absence of the explanatory power of the spreads. Market condition indicators, particularly those related to European markets, also have significant influence on credit yield spreads. The findings indicate that, in the UK, sub-debt spreads do reflect the issuing banks’ risk-taking, hence satisfying a critical precondition for sub-debts to be an instrument of market discipline in banking.

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e-pub ahead of print date: 23 November 2013
Published date: 1 May 2014

Identifiers

Local EPrints ID: 433995
URI: http://eprints.soton.ac.uk/id/eprint/433995
ISSN: 0148-6195
PURE UUID: 3a4c8843-114b-42f4-88d5-55a5141422cd

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Date deposited: 10 Sep 2019 16:30
Last modified: 08 Jan 2022 13:38

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Contributors

Author: Zhichao Zhang
Author: Wei Song
Author: Xin Sun
Author: Nan Shi

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