The question of whether private investors can rationally discriminate between the risk taken by banks is empirically investigated by testing the risk sensitivity of European banks' subordinated notes and debentures (SND) spreads. A unique dataset of issuance spreads, issues and issuers rating,...

During the last twenty years an increasing number of proposals to improve bank market discipline through the introduction of a mandatory subordinated debt policy have been drafted and critically discussed by academic economists and bank regulators. While theoretical issues are key in this...