Subordinated Bank Debt: The Best Place For Yield-Seeking Investors

Financial markets have entered a period of low and often negative yields. The main reason for this phenomenon is an accommodative monetary policy in Eurozone and Japan, where central banks are creating a permanent demand for government debt thus bidding up prices. As a result of these policies, in Japan government debt holdings of Bank of Japan have reached 64% of GDP. In search of yield, investors are turning to riskier strategies. Luckily, in the aftermath of Great financial crisis of 2008 a whole asset class has emerged, which offers attractive yields with moderate risk level. As some of you have probably guessed, we are referring to subordinated debt in financial sector.
Having learned some lessons of 2008, regulators and governments have created new regulatory framework intended to prevent the level of financial stress that brought the global financial system to the brink of collapse eight years ago. Prompted by new requirements such as Basel 3, during the last years banks have been improving the quality of balance sheets by dumping "toxic" assets and building up capital. For example, European banks have raised over 800B euros of capital over the past six years through earnings retention, rights issues and asset sales. New regulatory requirements such as Basel 3 imposes higher capital buffers of 6% of risk-weighted assets by 2019. European and domestic financial regulators are adopting additional requirements for systematically significant institutions.
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