MARKET DISCIPLINE THROUGH SUBORDINATED DEBT IN MEXICAN BANKS

This article empirically studies market discipline through subordinated debt in Mexico. It assesses whether banks that issued subordinated debt present a lower bank risk in comparison to non-issuing banks. It tests the hypothesis that low-quality banks pay higher interest rates (returns) on subordinated debt and issue fewer securities. I use a sample of 37 banks, 14 of which issued subordinated debt during the period from December 2008 to September 2012. Analyzing these 14 banks as a natural experiment, I use dynamic panel models with the SYS GMM estimator to verify the market discipline hypothesis. The findings do not suggest the presence of discipline induced by subordinated debt holders.