Using subordinated debt to monitor bank holding companies: Is it feasible?

Although accurate bond prices, are difficult to conic by. many have advocated that bank supervisors use subordinated debt spreads in the surveillance of large banking organizations. Our findings indicate that subordinated debt spreads are most consistent across data sources for the most liquid bonds, (i.e.. those of relatively large issuance size, relatively young age, issued by relatively large firms) traded in a relatively robust overall bond market. We also find a high degree of concordance in rankings of firms by their minimum spreads across bonds with especially strong agreement about which large firms are in the tails of the spread distribution at each point in time. Our time-series results further support and provide additional guidance for the use of subordinated debt spreads in supervisory monitoring, support the need for careful judgment when interpreting such spreads, highlight difficulties with currently available data sources, and motivate the need for further research.