Discussion Paper Series 2007-E-3

Determinants of Subordinated Debt Issuance by Japanese Regional Banks

Naohiko Baba, Masakazu Inada, Yasuo Maeda

This paper empirically investigates the determinants of subordinated debt issuance by Japanese regional banks during the period 2000-2005 using a probit model. The empirical results suggest the following: (i) Throughout the period, Japanese regional banks with a lower capital/asset ratio have a higher incentive to issue subordinated debts because they are counted as Tier 2 capital under the Basel Accord. (ii) During the period of instability in the Japanese banking system (2000-2003), investors tended to intensively use financial variables such as the non-performing loan ratio, ROA, and total deposits outstanding to screen good banks for their investments in the subordinated debts. (iii) During the period after the banking system regained stability (2004-2005), investors tended to pay less attention to the above variables due mainly to the mitigated default risk of these banks.

Keywords: subordinated debt; Japanese banks; Basel Accord; market discipline; non-performing loan problem

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2007 Bank of Japan All Rights Reserved.

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