Debt priority structure, market discipline, and bank conduct

Danisewicz, Piotr; McGowan, Danny; Onali, Enrico; Schaeck, Klaus

Abstract

© The Author 2017. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. 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 that confer priority on depositors reduces deposit rates but increases nondeposit rates. Importantly, subordinating nondepositor claims reduces bank risk-taking, consistent with market discipline. This insight highlights a role for debt priority structure in the regulatory framework.

Citation

Danisewicz, P., McGowan, D., Onali, E., & Schaeck, K. (2018). Debt priority structure, market discipline, and bank conduct. Review of Financial Studies, 31(11), 4493-4555. https://doi.org/10.1093/rfs/hhx111

• Journal Article Type: Article
• Acceptance Date: Aug 31, 2017
• Online Publication Date: Nov 4, 2017
• Publication Date: 2018-11
• Deposit Date: Jun 18, 2018
• Publicly Available Date: Nov 5, 2019
• Journal: Review of Financial Studies
• Print ISSN: 0893-9454
• Electronic ISSN: 1465-7368
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 31
• Issue: 11
• Pages: 4493-4555
• DOI: https://doi.org/10.1093/rfs/hhx111
• Keywords: Banks; Depository Institutions; Micro Finance Institutions; Mortgages G28 - Government Policy and Regulation
• Public URL: https://nottingham-repository.worktribe.com/output/892574
• Publisher URL: https://academic.oup.com/rfs/article/31/11/4493/4356575