Abstract
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 which confer priority on depositors reduces deposit rates but increases non-deposit rates. Importantly, subordinating non-depositor claims reduces bank risk-taking, consistent with market discipline. This insight highlights a role for debt priority structure in the regulatory framework.
Original language | English |
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Article number | hhx111 |
Pages (from-to) | 4493-4555 |
Number of pages | 63 |
Journal | Review of Financial Studies |
Volume | 31 |
Issue number | 11 |
Early online date | 4 Nov 2017 |
DOIs | |
Publication status | Published - Nov 2018 |
Structured keywords
- AF Banking
Keywords
- market discipline
- debt priority structure
- banking regulation
- natural experiment
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Dive into the research topics of 'Debt Priority Structure, Market Discipline and Bank Conduct'. Together they form a unique fingerprint.Profiles
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Professor Klaus Schaeck
- School of Accounting and Finance - Professor of Banking and Finance
Person: Academic