Mandatory Subordinated Debt and the Corporate Governance of Banks

Given current debates on the future direction of bank regulatory design, the objective of this paper is to raise awareness of a new and potentially significant tool in the corporate governance of banks. Public policy proposals to improve the nature of bank regulation through private-sector solutions and, in particular, mandatory subordinated debt market discipline provide such an opportunity. This paper argues that apart from creating an additional class of bank stakeholder whose interests align with the risk-reduction objectives of the regulatory authorities, a suitable mandatory subordinated debt policy (MSDP) could also provide a new and meaningful voice in the corporate governance of banks.

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