Bank failure resolution policies and subordinated debt

Abstract

This chapter extends Panyagometh and Roberts (2008) by taking into account differences in costs of closure among countries and the effects of subordinated debt on moral hazard problems. Our results show that a mandatory subordinated debt policy (MSDP) can be used with contingent purchase and assumption policy to further reduce probability of future bank failure if the high level of uninsured debt can improve the effectiveness of monitoring. While a MSDP might be appropriate for some developed countries with effective informational and supervisory environments and developed financial markets, such as the U.S., extending a MSDP into developing countries is questionable.

Citation

Panyagometh, K. and Roberts, G.S. (2009), "Bank failure resolution policies and subordinated debt", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 87-125. https://doi.org/10.1108/S0196-3821(2009)0000025006