The Market Discipline Effect Of Commercial Bank's Subordinated Debt

The development of the world's economy indicates that the development of the finance has big impetus and effect to the development of the economy. Finance is the core of the economical system now. However since the latter half of the 20th century, along with the economy's big development the flowage of the capital is more frequent. So the turbulence of the finance is pricking up. How to make the finance runs safely and effectively is a big problem, and the finance regulation becomes more important.Since 1970's, along with the wreckage of the government's intervene, market discipline comes under regard especially after the New Basel Capital Adequacy Framework. Along with the development of the subordinated debt's market, its market discipline effect becomes more and more important. Since 2003 our country has bring forward some prescript about subordinated debt and it also has a big amount yet. However our country's subordinated debt market is at a start phase, how to expedite its development and bring its market discipline into play is a big problem. And this is the meaning of this paper.There are four chapters in this paper.In the first chapter I bring forward the concept of the market discipline and explain its act mechanism. There are two sections in this chapter. In first section I firstly give the definition of the market discipline. The existence of market sensitivity to bank risk by regressing the relative cost of bank funds on balance sheet and /or income statement measures of risk, return, and market position. And market discipline can restrain the moral risk of the bank, avoid the mistake of the regulator and increase the regulator's sensitivity to the financial innovation. In the second section I introduce the Two-stage Process of Recognition and Control. Flannery and Sorescu (1996) discuss how market investors could recognize and control the risks of banking firms, which suggests that market discipline must satisfy a two-stage process. Bliss and Flannery (2001) suggest that market discipline consists of two distinct components: monitoring and influence. These concepts naturally align with the processes of recognition and control.There four sections in chapter two. I give the definition of the subordinated debt in section. Its long-term, big risk and later-discharge traits judge its investors need to pay attention to the operation of the bank and do some operation at key time. The second section is to introduce the theoretics of the market discipline, it is the entrust-surrogate theory. In the third section, I analyze how the subordinated debt exerts the market discipline effect and give some tracks to explain it. In the last section I outline four conditions necessary for the effective implementation of market discipline. The four conditions are as follows: open capital markets, public disclosure of bank capital structure and risk exposures, market participants must not believe that the banks would be bailed out in the case of an actual or impending default, and banks must respond to market signals.In the third chapter I introduce some subordinated debt practice in foreign countries. I choose America and Argentina, because they are representative and they are profuse about the research of the subordinated debt. We can learn from them and develop healthy and fleetly.The last chapter is the keystone of this paper. I introduce our country's subordinated debt actuality, analyze its problem and its necessary condition's shortage, then I bring forward some feasible advice.Subordinated debt can give commercial bank effective market discipline effect. It can help the bank run safely and develop fast. So we should make great efforts on our country's subordinated debt development and strengthen its necessary condition to exert its market discipline effect.This paper's innovation:(1)The subject of this paper is novel. Subordinated debt is a new financial implement in our country, and the research about it is very immature, so this is meaningful and helpful to the development of subordinated debt.(2)I introduce the market discipline effect of the subordinated debt in detail.(3)This paper analyze the basic of the theory with which the subordinated debt can discipline the market in particular with the theory of entrust-surrogate.