Market Discipline and Banking Supervision: The Role of Subordinated Debt

Market Discipline and Banking Supervision: The Role of Subordinated Debt

One of the aims of mandatory subordinated debt is to enhance both direct and indirect market discipline. Indeed, on the one hand, holding subordinated debt can affect banks' behaviour by changing their funding costs and, on the other hand, the rate of return of subordinated debt can be used by supervisors as a signal of their riskiness.

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