The Research On The Effect Of The Issuance Of Subordinate Debt By Domestic Commercial Bank

Subordinated debt is a type of debt which is issued by a commercial bank and whose principal and interest ranks after other debts but before the bank equity capital should a company be closed. It is a special type of debt which is used by a commercial bank as an important way to replenish its capital funds. Since the Chinese commercial banks started to issuesubordinated debt in 2003, a total of over $200 billion yuan of such debt has been issued by stated-owned commercial banks, commercial banks with stock system and city commercial banks. However, little research has been conducted on this new financial innovation. This article explores the effects of subordinated debt issued by commercial banks.Issuing subordinated debt generates positive results in replenishing the capital funds of commercial banks, enhancing the market constraints over commercial banks, improving the management mechanism of commercial banks, helping the banks build the capacity of managed liability, maximizing the structure of assets and liabilities, improving the management ofassets and liabilities, promoting the bond market and providing more options for investors. It has especially positive effects on the replenishment of capital funds. As a matter of fact, it has become a key tool for commercial banks to replenish capital funds in recent years.Issuing subordinated debt has created some negative results as well. These negative results include risks for commercial banks such as long-term financial cost, increased inflated capital in the whole banking sector, and potential consequences caused by the exaggeration of the role subordinated debt plays.Moreover, subordinated debt can bring risks to individual investors, who may make investment decisions without being fully aware of the risks of this type of debt. Holding each other subordinate debt may result in risks in the industry. Issuing subordinated debt may also negatively influence the monetary policy. This is especially true when the Central Bank is implementing the expansionary monetary policy. The result will be an over expansion of bank loans.The main causes of these risks include the lack of a sound foundation of the system, the frail market, and limited constraints of the market over the banks,direct or indirect. In order to reduce the risks, it is important to improve the system, the external environment, the market, and the management of the liquidity of subordinated debt, to encourage institutional investors, and to attach more importanceto the issuance and management of subordinated debt.