Abstract
We study the influence of unsecured debt (subordinated debt) on banks’ risk-taking in a contingent claim model where assets are risky debt claims. We consider the bargaining between stockholders and debtholders when choosing the level of asset risk. Replacing part of a bank's stock with subordinated debt leads to risk-shifting events occurring in a narrower domain of asset values (leverage ratios), but can lead to higher levels of risk, depending on the relative bargaining power. When side payments between the bank's claimholders are possible the inclusion of subordinated debt does not affect asset risk. Moreover, we show that severe, yet infrequent, regulatory corrective measures might have adverse effects on risk-shifting.
Original language | English |
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Article number | 102198 |
Journal | Journal of Corporate Finance |
Volume | 74 |
DOIs | |
State | Published - Jun 2022 |
Bibliographical note
Publisher Copyright:© 2022 Elsevier B.V.
Funding
The authors would like to express their deep gratitude to Yaron Leitner, Nittai Bergman, participants at 2019 European meeting of the Econometric Society, IRMC 2020 annual meeting, FEBS 2019 annual meeting and the 2018 meeting of the Israel Economic Association as well as to seminar audiences at Tel Aviv University and Bar Ilan University for many useful comments. All authors gratefully acknowledge the financial support of the Israeli Science Foundation (#2443/19). YH gratefully acknowledges the financial support of the European Research Council (#677057). The authors would like to express their deep gratitude to Yaron Leitner, Nittai Bergman, participants at 2019 European meeting of the Econometric Society, IRMC 2020 annual meeting, FEBS 2019 annual meeting and the 2018 meeting of the Israel Economic Association as well as to seminar audiences at Tel Aviv University and Bar Ilan University for many useful comments. All authors gratefully acknowledge the financial support of the Israeli Science Foundation ( #2443/19 ). YH gratefully acknowledges the financial support of the European Research Council ( #677057 ).
Funders | Funder number |
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Econometric Society | |
Israel Economic Association | |
Information Resources Management College | |
Horizon 2020 Framework Programme | 677057 |
European Commission | |
Israel Science Foundation | 2443/19 |
Tel Aviv University |
Keywords
- Asset risk
- Bargaining
- Financial institutions
- Leverage
- Risk-taking
- Stress test