We build a moral hazard model to show that issuing of subordinated debts by banks can bring direct market discipline and indirect market discipline to make their loans less risk. The direct market discipline means that the risk level of bank will be evaluated by professional investors. The investors will require the yields according to the banks risk. For lowering the cost of issuing subordinated debts, banks will make their loans less risk. The indirect market discipline means that the depositors would take the yields of these debts as a significant signal about banks` risk level. The deposits will decide to withdraw their savings when the bank signals a higher risk, and keep their saving when the bank signals a lower risk. We prove that issuing of subordinated debts by banks can bring these two kinds of market discipline. The model has also demonstrated that if the banking supervisor can utilize the information of issuing subordinated debts effectively, they will achieve further supervisory goal.
英文關鍵字
Subordinated Debt, Direct Market Discipline, Indirect Market Discipline
