Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 2, 2001 erstellt
Description:
As provisions on bank capital requirements (e.g., Basel Capital accord) become more and more complicated, monitoring costs increase sharply for both banks and banking supervisory authorities. It is questionable, however, whether capital accords can assess the bank's exposure with sufficient accuracy. Thus, we may look for alternatives; for instance how to use market forces for supervisory purposes. When banks are obliged to issue subordinated bonds, bond prices and yields may reflect the bank's exposure more precisely and possibly at less cost.In this paper we address two points which have been neglected so far and which may be important in order to evaluate the costs and benefits of subordinated bonds correctly. First, we discuss how to create a bond market with yields and prices reliably reflecting the bank's exposure. We suggest perpetual subordinated bonds since this may make the bond market more liquid and reduces the required liquidity premium, thus enhancing the information function of yields and prices. Second, we show that subordinated bondholders may be interested in risk-increasing activities when the bank faces financial distress whereas depositors are interested in decreasing risk. Thus, there should be an upper boundary on subordinated debt