Studies that have considered recent secondary market spreads on subordinated debt have found them to be statistically sensitive to various measures of risk. Importantly, while risk-sensitivity of subordinated debt spreads is necessary for market participants to exert indirect market discipline on banking organizations, it is not sufficient.
Market participants outside of the subordinated debt market also must monitor these spreads to assess the condition of the banking organization. Indeed, market participants confirm that the “Street,” not just the bond market, appears to pay considerable attention to such spreads.