Above and beyond this implication that issuance costs are risk sensitive, this empirical evidence suggests that direct market discipline is substantial enough in the subordinated debt market to affect actual decisions made by banking organizations. The evidence with respect to indirect market discipline is also encouraging.
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.