Using data for publicly listed commercial banks and bank holding companies around the world, I investigate the market discipline effect of subordinated debt on banking firm risk taking in the period 2002-2008. In addition, I examine whether this effect depends on national bank regulations and legal and institutional conditions. I provide evidence that subordinated debt has a mitigating effect on banking firm risk taking. Further, the results suggest a threshold level of national bank regulations and economic development above which subordinated debt mitigates risk taking. Overall, the evidence supports the efficacy of proposals calling for increased use of subordinated debt in banking firms.
