The Role of Subordinated Debt in Market Discipline: The Case of Emerging Markets

Author/Editor:

Cem Karacadag ; Animesh Shrivastava

Publication Date:

December 1, 2000

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper evaluates the potential role of mandatory subordinated debt (MSD) in enhancing market discipline in emerging markets. The conceptual merits and key preconditions of MSD are first reviewed. Then, the extent to which emerging markets satisfy these preconditions—among them the monitorability of bank assets, the presence of nonbank financial investors, and liquid and “clean” capital markets—are evaluated. We find that emerging markets do not satisfy the preconditions for the successful implementation of a MSD policy. Therefore, efforts to enhance market discipline should first focus on satisfying these preconditions and improving the overall incentive environment and market infrastructure.

Series:

Working Paper No. 2000/215

Subject:

Banking Capital markets Emerging and frontier financial markets Financial institutions Financial markets Securities markets Stock markets Stocks Tax incentives

English

Publication Date:

December 1, 2000

ISBN/ISSN:

9781451875034/1018-5941

Stock No:

WPIEA2152000

Pages:

31

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