0 3 0 1 Monitoring and Controlling Bank Risk : Does Risky Debt Serve any
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Monitoring and Controlling Bank Risk: Does Risky Debt Serve any Purpose?
We examine whether mandating banks to issue subordinated debt would serve to enhance market monitoring and control risk taking. To evaluate whether subordinated debt enhances risk monitoring, we extract the credit-spread curve for each banking firm in our sample and examine whether changes in credit spreads reflect changes in bank risk variables, after controlling for changes in market and liqu...
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This paper examines how the aliation of banking and commerce aects the ®rmÕs investment eciency and the bankÕs risk exposure. The bankÕs holding of a borrowing ®rmÕs equity reduces the agency con ̄ict between the ®rm and the bank, but increases the monitoring need of uninformed debtholders. Thus, the ®rmÕs investment eciency is maximized when the bankÕs equity share is between zero and its d...
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We consider a model in which banks face two moral hazard problems: 1) asset substitution by shareholders, which can occur when banks make socially-inefficient, risky loans; and 2) managerial under-provision of effort in loan monitoring. The privately-optimal level of bank leverage is neither too low nor too high: It efficiently balances the market discipline that owners of risky debt impose on ...
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We thank Greg Udell, Patricia Wilson, and participants at the 1995 FMA meetings for helpful comments and discussions. We are responsible for any mistakes that remain. The views in this paper are not necessarily those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. Abstract We examine a firm's choice between public and private debt in a model where the firm's financing...
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