[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"detail-sidebar-cat-0-en-105":3,"doc-seo-325032-105":59,"doc-detail-325032-en":130},{"code":4,"msg":5,"data":6},0,"success",[7,13,18,23,28,33,38,43,48,51,55],{"id":8,"doc_module":4,"doc_module_name":9,"category_name":10,"show_sort_weight":11,"slug":12},1,"Document","Story & Novel",90,"story-novel",{"id":14,"doc_module":4,"doc_module_name":9,"category_name":15,"show_sort_weight":16,"slug":17},2,"Literature",80,"literature",{"id":19,"doc_module":4,"doc_module_name":9,"category_name":20,"show_sort_weight":21,"slug":22},4,"Exam",70,"exam",{"id":24,"doc_module":4,"doc_module_name":9,"category_name":25,"show_sort_weight":26,"slug":27},5,"Comic",60,"comic",{"id":29,"doc_module":4,"doc_module_name":9,"category_name":30,"show_sort_weight":31,"slug":32},6,"Technology",50,"technology",{"id":34,"doc_module":4,"doc_module_name":9,"category_name":35,"show_sort_weight":36,"slug":37},7,"Healthcare",40,"healthcare",{"id":39,"doc_module":4,"doc_module_name":9,"category_name":40,"show_sort_weight":41,"slug":42},8,"Research & Report",30,"research-report",{"id":44,"doc_module":4,"doc_module_name":9,"category_name":45,"show_sort_weight":46,"slug":47},9,"Religion & Spirituality",20,"religion-spirituality",{"id":46,"doc_module":4,"doc_module_name":9,"category_name":49,"show_sort_weight":46,"slug":50},"World Cup","world-cup",{"id":52,"doc_module":4,"doc_module_name":9,"category_name":53,"show_sort_weight":52,"slug":54},10,"Lifestyle","lifestyle",{"id":56,"doc_module":4,"doc_module_name":9,"category_name":57,"show_sort_weight":24,"slug":58},19,"General","general",{"code":4,"msg":60,"data":61},"ok",{"site_id":62,"language":63,"slug":64,"title":65,"keywords":66,"description":67,"schema_data":68,"social_meta":123,"head_meta":125,"extra_data":127,"updated_unix":129},105,"en","credit-spreads-and-subordinated-debt","Credit Spreads and Subordinated Debt","","Credit insurance can distort banks’ risk-taking by weakening market discipline: depositors know their deposits are guaranteed, so they have little incentive to demand higher rates or withdraw funds. One proposed remedy is mandatory subordinated debt, which introduces funding that absorbs losses after depositors are paid. Market discipline then depends on repricing and the informational content of subordinated-debt yields, measured via credit spreads. The text explains how researchers construct credit spreads by removing interest-rate effects and adjusting for embedded options and collateral to isolate default-risk information.",{"@graph":69,"@context":122},[70,84,105],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/credit-spreads-and-subordinated-debt/325032/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/credit-spreads-and-subordinated-debt/325032.png","ImageObject",300,407,{"name":92,"@type":93},"Himbo","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-30","2026-09-21",true,{"@type":102,"interactionType":103,"userInteractionCount":34},"InteractionCounter",{"@type":104},"ViewAction",{"@type":106,"mainEntity":107},"FAQPage",[108,114,118],{"name":109,"@type":110,"acceptedAnswer":111},"Why does deposit insurance weaken natural market discipline in banking?","Question",{"text":112,"@type":113},"Deposit insurance counteracts the market forces that would otherwise limit excessive risk. Because depositors know their deposits are guaranteed, they have little incentive to demand higher returns or withdraw funds.","Answer",{"name":115,"@type":110,"acceptedAnswer":116},"What is mandatory subordinated debt intended to achieve?",{"text":117,"@type":113},"It compels banks to issue debt that the government does not guarantee and that is repaid only after depositors are satisfied. This makes holders absorb losses, aligning the pricing of risk with bank solvency.",{"name":119,"@type":110,"acceptedAnswer":120},"How are credit spreads used to extract risk information from bond yields?",{"text":121,"@type":113},"A credit spread is calculated as the difference between the yield on a risky bond and a risk-free bond of the same maturity, often interpreted as a premium for default risk. Researchers adjust yields to remove other influences such as interest-rate changes and embedded options.","https://schema.org",{"og:url":83,"og:type":124,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":126,"canonical":83},"index,follow",{"doc_id":128,"site_id":62},325032,1790624672,{"code":4,"msg":5,"data":131},{"doc_id":128,"user_id":132,"nickname":92,"user_avatar":133,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":134,"file_id":135,"file_url":136,"file_type":137,"file_size":138,"view_count":34,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":24,"language":139,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":140,"faqs":141,"seo_title":142,"seo_description":67,"update_tm":143,"read_time":144,"preview_page_count":4},687197100911,"https://ap-avatar.wpscdn.com/avatar/a000239b6f1da00475?x-image-process=image/resize,m_fixed,w_180,h_180&k=1785132997149421697","by Joseph G.Haubrich and James B.Thomson  \nEver since deposit insurance wasintroduced,economists and policymak-ers have been trying to correct its unin-tended consequences.The heart of theproblem is that deposit insurance coun-teracts the natural market forces thatwould ordinarily keep banks from tak-ing on too much risk.For most firms,taking on more risk means they haveto pay more to raise money becauseinvestors demand a higher return tocover the risk.But banks can avoidsuch direct market pressure becausedepositors,who know that their depos-its are guaranteed,have little incentiveto demand a higher rate or withdrawtheir funds  \nOne proposed means of injecting moremarket discipline into the banking sec-tor is a subordinated debt requirement.It would compel banks to issue somedebt that the government does notguarantee and that is paid off only afterall depositors have been satisfied.Amandatory subordinated debt require-ment was one of the reforms recom-mended in a 1986 study commissionedby the American Bankers Association.In addition,the Financial Moderniza-tion Act of 1999 requires that largebanking companies have outstanding,at alltimes,at least one(though notnecessarily a subordinated)debt issuerated by a commercial credit-ratingagency.  \nSome experts argue that subordi-nated debt is unnecessary becauseequity capital already gives deposi-tors and other bank creditors a layerof protection.But banks'equity—thatis,their stock—rises when their prof-its increase,so the prospect of higherequity can encourage them to takegreater risks.Debt is more sensitive  \n# Credit Spreads and Subordinated Debt\n\nthan equity to the loss aspect of riskbecauseit lacks the upside inducementof higher profits.Subordinated debtthus gives a bank's depositors and gen-eral creditors the same protection fromlosses as equity does,without creatingthe incentive to assume more risk.  \nAn important channel through whichsubordinated creditors can exert market-based discipline is the pricing of subor-dinated debt:Risky banks would haveto pay higher interest rates than safebanks to issue such debt.Because sub-ordinated debt is paid back only afterdepositors are,those holding it absorblosses that would otherwise accrue touninsured depositors and the depositinsurance fund.Unlike depositors,sub-ordinated creditors cannot be sure theywill be able to withdraw their fundsfrom a bank whose solvency comesinto question.As a result,the yieldon banks'subordinated debt shouldvary wth the riskiness of the bank,and decisions by bank managers andshareholdersto increase their institu-tions'risk would raise the cost of issu-ing debt.  \nWhether repricing three to fourpercent of a bank's funds (the typicalshare required in most mandatory sub-ordinated-debt proposals)would exertmeaningful discipline on risk-takingremains debatable.However,to theextent that yields on new and outstand-ing subordinated debt reflect underly-ing risk,mandatory subordinated-debtrequirements could give markets andbank supervisors useful informationon the riskiness of banking compa-nies.A review ofrecent research on theinformation that can be gleaned fromthese yields,however,suggests thatmuch more work needs to be done on  \nMarch 1,2007  \nStock and bond prices contain allsorts of information about investors'beliefs and expectations.For exam-ple,the interest rate on bank debt notinsured by the FDIC has informationabout the health of the banks issuingthe debt.Unfortunately,difficultiesin extracting information from thesesubordinated debt prices reduce theinformation's usefulness to regulatorsand policymakers.  \nextracting useful,reliable risk indicatorsfrom them before a subordinated debtrequirement for banks is warranted.  \n## ■ Credit Spreads\n\nTo extract information from subor-dinated-debt yields about investorsperceptions ofthe underlying riski-ness of various issuers,researchersmust remove other sorts of informa-tion from the yields,such as that whichreflects changes in interest rates.To dothis,they can co","cbCaioi0bHykSVSH","https://ap.wps.com/l/cbCaioi0bHykSVSH","pdf",1230776,"English","# Credit Spreads and Subordinated Debt\n## Credit Spreads","[{\"question\":\"Why does deposit insurance weaken natural market discipline in banking?\",\"answer\":\"Deposit insurance counteracts the market forces that would otherwise limit excessive risk. Because depositors know their deposits are guaranteed, they have little incentive to demand higher returns or withdraw funds.\"},{\"question\":\"What is mandatory subordinated debt intended to achieve?\",\"answer\":\"It compels banks to issue debt that the government does not guarantee and that is repaid only after depositors are satisfied. This makes holders absorb losses, aligning the pricing of risk with bank solvency.\"},{\"question\":\"How are credit spreads used to extract risk information from bond yields?\",\"answer\":\"A credit spread is calculated as the difference between the yield on a risky bond and a risk-free bond of the same maturity, often interpreted as a premium for default risk. Researchers adjust yields to remove other influences such as interest-rate changes and embedded options.\"}]","Credit Spreads and Subordinated Debt | PDF",1789969505,13]