19-39 One of the overall objectives in using subordinated debt in addition to common stock for a DI's capital base is to improve market discipline of a DI's risk structure.

Question

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Subordinated debt holders have a higher risk of not being paid back in case of bank failure and therefore, they have a greater incentive to monitor the risk-taking behavior of the bank. This enhances market discipline and encourages the bank to maintain a sound risk structure.

19-39 One of the Overall Objectives in Using Subordinated Debt