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Debt priority structure, market discipline, and bank conduct

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

Authors

Piotr Danisewicz

Danny McGowan

Enrico Onali

Klaus Schaeck



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 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.

Journal Article Type Article
Publication Date Nov 4, 2017
Journal Review of Financial Studies
Print ISSN 0893-9454
Electronic ISSN 0893-9454
Publisher Oxford University Press (OUP)
Peer Reviewed Peer Reviewed
Volume 31
Issue 11
Pages 4493-4555
APA6 Citation Danisewicz, P., McGowan, D., Onali, E., & Schaeck, K. (2017). Debt priority structure, market discipline, and bank conduct. Review of Financial Studies, 31(11), 4493-4555. doi:10.1093/rfs/hhx111
DOI https://doi.org/10.1093/rfs/hhx111
Keywords Banks; Depository Institutions; Micro Finance Institutions; Mortgages G28 - Government Policy and Regulation
Publisher URL https://academic.oup.com/rfs/article/31/11/4493/4356575
Copyright Statement Copyright information regarding this work can be found at the following address: http://eprints.nottingh.../end_user_agreement.pdf
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Copyright Statement
Copyright information regarding this work can be found at the following address: http://eprints.nottingham.ac.uk/end_user_agreement.pdf





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