Does Subordinated Debt Play a Role for Market Discipline?

This paper examines the link between the issuance of subordinated debt by commercial banks and market discipline. Using cross-sectional and time-series data from 2002 to 2007, we empirically examine the relationship between banks' risk level and their decisions to issue subordinated debts in Taiwan. In particular, we test the hypothesis that the commercial banks with low risk levels prefer to issue subordinated debts more than high-risk banks do, and we reject the hypothesis. We conclude that the application of subordinated debt is not a mature channel for providing market discipline for commercial banks in Taiwan. We offer potential reasons for this finding and discuss the policy implications of our findings.