Banks’ risk taking and creditors’ bargaining power

We study the influence of unsecured debt (subordinated debt) on banks’ risk-taking in a contingent claim model where assets are risky claims. consider bargaining between stockholders and debtholders when choosing level asset risk. Replacing part bank's stock with subordinated leads to risk-shifting events occurring narrower domain values (leverage ratios), but can lead higher levels risk, depending relative power. When side payments claimholders possible inclusion does not affect Moreover, we show that severe, yet infrequent, regulatory corrective measures might have adverse effects risk-shifting.