افزایش انضباط در بانکداری : نقش بدهی فرعی در اصلاح مقررات مالی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|5209||2011||22 صفحه PDF||سفارش دهید||محاسبه نشده|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Economics and Business, Volume 63, Issue 1, January–February 2011, Pages 1–22
The increasing complexity of large financial firms has led to consideration of alternative regulatory structures. This has intensified recently because of the worldwide turmoil in financial markets. One important consideration has been to increase reliance on market discipline—most notably, increased reliance on subordinated debt (sub-debt) in the bank capital structure to discipline banks’ risk taking. This proposal, however, has been subject to criticism related to the quality of the signal generated in current sub-debt markets. We argue that previous studies evaluating the potential usefulness of sub-debt proposals have evaluated sub-debt spreads in a very different environment from that characterized by a fully implemented sub-debt program, where the market will become deeper, issuance will be more frequent, debt will be viewed as a more viable means to raise capital, bond dealers will be less reluctant to publicly disclose more details on debt transactions, and generally, the market will be more closely followed. As a test to see how the quality of the signal may change, we evaluate the risk-spread relationship—accounting for the enhanced liquidity and market transparency surrounding new debt issues. Our empirical results indicate a superior risk-spread relationship surrounding the period of new debt issuance due, we posit, to greater liquidity and transparency. Our results overall suggest that the degree of market discipline would be significantly enhanced by a mandatory sub-debt program, thus suggesting a potential role for sub-debt in the banking regulatory reform.
“When pursuing regulatory objectives through the application of market discipline, regulators must consider the nature of the incentives faced by different types of stakeholders… equity holders may “gamble for resurrection” by encouraging rather than discouraging excessive risk-taking… holders of uninsured debt don’t benefit if the bank's stock price rises when undue risk-taking pays off. Consequently, they focus on what bank managers are doing to avoid default… The incentive to monitor risk-taking is particularly keen for holders of subordinated debt, as they are last in line in the event of failure. Because debt holders are sensitive to changes in the probability of financial distress, risk-taking by a bank raises its cost of funding in credit markets, and that connection creates an incentive for banks to control risks. Moreover, the price of a bank's debt provides useful information about the bank's riskiness. With that information, the bank's counterparties and supervisors can take steps of their own to ensure that the bank is operating safely…” [Bernanke, 2007]. With the turmoil in current financial markets, there have been calls for significant modifications to bank regulation.1 Risk management and supervision appear to have failed in recent years and numerous reform proposals have been offered to prevent similar incidents in the future [see Congressional Oversight Panel, 2009, Larosiere, 2009 and Litan and Baily, 2009]. However, the calls for reform are not new, as there has been a growing awareness that increased reliance on alternative oversight forces has become necessary as the banking industry has become increasingly complex.2 For this reason, market discipline was one of the three pillars supporting safety and soundness of the banking system in the Basel Capital Accord (Basel II) framework. In establishing a more effective market discipline in banking, it has been argued that subordinated debt (sub-debt) could potentially play a vital role as a component of required capital—especially at large and complex banking organizations (LCBOs). Indeed, there is evidence that debt yields do vary with the riskiness of firms and there was information embedded in sub-debt spreads for certain financial institutions prior to the market meltdown in the fall of 2008. Recently there have also been proposals to introduce contingent capital to supplement equity capital. This usually takes the form of subordinated debt that automatically converts to equity when a conversion event occurs, thus helping to replenish the bank's equity base; see Flannery (2009) and Hancock and Passmore (in press). The financial crisis that started in August 2007 has demonstrated that there was insufficient market discipline in the banking industry and banks were not constrained from taking excessive risk. Bernanke (2007) points out that neither market discipline nor regulatory oversight alone is completely adequate for keeping the banking system safe and sound and that the value of a hybrid system, where direct regulation and market discipline supplements one another, has been increasingly appreciated. We argue that mandating sub-debt issuance, whether convertible or not, would force the bank to continually “pass the test of the market” and provide signals to market participants and regulators about the condition of the bank. Banks would be required to regularly approach the market and would not be able to opt out of issuing sub-debt during periods when yields may send negative signals to the market.3 To avoid the increased funding costs and adverse market signal, banks would operate in their own self-interest and prudently manage their risk. Debt holders have an incentive-structure that makes them a preferred source of market discipline—they have significant concern about downside risk of the bank (since they want to be repaid) and they have little incentive to allow the bank to pursue higher (and riskier) returns, since the debt holders do not share in any upside gains (as would, for example, an equity position). This incentive structure is similar to that of a bank supervisor. Previous research found that sub-debt spreads do indeed reflect an issuing bank's financial condition [see Allen et al., 2001, DeYoung et al., 2001, Flannery and Sorescu, 1996, Jagtiani et al., 2002, Jagtiani and Lemieux, 2001, Morgan and Stiroh, 2000, Morgan and Stiroh, 2001a and Morgan and Stiroh, 2001b], satisfying a precondition for sub-debt proposals to be effective. In addition, Evanoff and Wall, 2001 and Evanoff and Wall, 2002 find evidence that sub-debt spreads may be more informative for identifying problem banks than the current regulatory measures used by U.S. bank supervisors to trigger ‘prompt corrective action.’ Yet, a mandatory sub-debt program has not been implemented as there remain concerns about the quality of signals extracted from sub-debt yields. That is, the concern is that the current lack of market depth, trading frequency, heterogeneous debt characteristics, and infrequency of issuance may not produce such a reliable market signal for monitoring the LCBO operations.4 In this study, we contend that previous studies have likely underestimated the potential usefulness and effectiveness of the sub-debt programs. As may be explained by the standard Lucas Critique, the environment in which sub-debt yields have been evaluated in previous studies may be very different from an environment characterized by a fully implemented, mandatory sub-debt program. With a formal sub-debt program in place, the sub-debt markets will likely become deeper, issuance will become more frequent, sub-debt will be viewed as a more viable means to raise regulatory capital, more attention will be paid to individual bank sub-debt yields, bond dealers will be pressured (by both the banks and the public) to be less reluctant to publicly disclose actual debt transaction prices, and generally, the markets will be more closely followed. As a result, the market will become more complete and the market signals become more informative—thus, the concerns about the quality of sub-debt signals could be significantly mitigated in the new sub-debt market environment. Our analysis takes into consideration these potential changes in the sub-debt market environment in examining the risk-spread relationship by focusing on the performance of sub-debt markets at times when they are thought to most closely approximate the new proposed environment—i.e., the period surrounding new debt issues. We postulate that current markets are potentially “deeper,” more transparent, and informative around initial placements, resulting in significantly different risk pricing behavior. We find empirical evidence consistent with this contention. Therefore, the actual market discipline imposed with a fully implemented sub-debt program will likely be significantly greater than that suggested in previous studies. With a fully implemented program, sub-debt markets will most likely become even deeper and more fluid than those seen around new issues in today's markets. Thus, our analysis should be considered an improvement, but a lower bound measure of the potential increase in market discipline following the introduction of a mandatory sub-debt policy. The paper proceeds as follows. We present the literature review in Section 2. In Section 3, we introduce our empirical approach for evaluating the extent to which sub-debt yields reflect bank risks and how the risk-spread relationship may differ in an environment with a mandatory sub-debt program. Our data and the empirical results are presented and discussed in Section 4. Finally, Section 5 summarizes and evaluates the policy implications.
نتیجه گیری انگلیسی
There have recently been a number of banking reform proposals to increase the role of subordinated debt in the bank capital requirement in order to increase market discipline on large and complex banking organizations (LCBOs). There has also been a growing consensus that bank risk could be more effectively regulated if market information and market discipline were more fully incorporated into the bank supervisory process. Effective market discipline will enhance the quality of market signals, which can be used by bank supervisors for on-site as well as off-site monitoring efforts to identify problem institutions. This could help regulators allocate supervisory resources more efficiently. Previous studies have found that sub-debt markets do differentiate between banks with different risk profiles. However, these studies have evaluated the potential usefulness of sub-debt in an environment that most likely is very different from the one that will characterize a fully implemented sub-debt program. With a sub-debt program, the market will likely become deeper as issuance will be more frequent, debt will be viewed as a more viable means to raise capital, more attention will be paid to individual bank debt yields, bond dealers will be less reluctant to publicly disclose more details on debt transactions, and generally, the market will be more closely followed and sub-debt signals will be more informative. Fundamentally, banks will respond to the new regulation and optimize within the new regulatory framework with constraints that may be very different from those that existed before the reform. In order to get an indication of the potential differences between the current and potential sub-debt markets, we evaluate the risk-spread relationship by taking into consideration the enhanced market transparency surrounding new debt issues. Our empirical results are consistent with the existence of market discipline in the sub-debt market and with the degree of market discipline being stronger (a tighter risk-spread relationship) during the period around new debt issuance. We attribute this to greater liquidity and transparency. Our overall results support the argument that the degree of market discipline in the U.S. banking industry would likely be enhanced by requiring banks to maintain part of their regulatory capital requirement in the form sub-debt and to ‘come-to-the-market’ at regular intervals with new debt issues regardless of their current financial condition. A common argument given for not going forward with such a program is that the characteristics of the market are such that the signal may be too noisy to use for public policy. That is, sub-debt markets are too thin, and instrument characteristics are too heterogeneous. However, as explained earlier, once a program is initiated, the markets will become deeper and, if the program is implemented properly, the instruments will become much more homogeneous. What we have tried to show in our analysis is that even in today's environment, the sub-debt market seems to operate more effectively during periods that more closely resemble the state of the world that would exist with a fully implemented sub-debt program. With a fully implemented program, sub-debt markets would likely become even deeper and more fluid than is the case around new issues in today's markets, making our estimates of increased market discipline a lower bound of the potential for such a program. Such proposals would appear to us to be a viable component of any financial regulatory reform resulting from the current financial crisis.