Debt priority structure, market discipline, and bank conduct

Danisewicz, Piotr, McGowan, Danny, Onali, Enrico and Schaeck, Klaus (2017) Debt priority structure, market discipline, and bank conduct. Review of Financial Studies . ISSN 0893-9454

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We examine how debt priority structure affects bank funding costs and soundness. Leveraging an unexplored natural experiment that changes the priority of claims on banks’ assets, we document asymmetric effects that are consistent with changes in monitoring intensity by various creditors depending on whether creditors move up or down the priority ladder. The enactment of depositor preference laws that confer priority on depositors reduces deposit rates but increases nondeposit rates. Importantly, subordinating nondepositor claims reduces bank risk-taking, consistent with market discipline. This insight highlights a role for debt priority structure in the regulatory framework.

Item Type: Article
Keywords: G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages G28 - Government Policy and Regulation
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > Nottingham University Business School
Identification Number:
Depositing User: Eprints, Support
Date Deposited: 18 Jun 2018 12:54
Last Modified: 04 May 2020 19:16

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