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Using Subordinated Debt as an Instrument of Market Discipline
Source: Federal Reserve

Introduction

1.  Why a Subordinated Debt Policy?

Why subordinated debt?

SND proposals

2.  Evidence on the Potential Market-Discipline Effects of Subordinated Debt

Literature review

Views of market participants

New evidence

  Model specification
  Empirical results
  Implications for direct and indirect market discipline

Could an SND policy be expected to improve market discipline?

3.  Analysis of the Key Characteristics of a Subordinated Debt Policy

What institutions should be subject to an SND policy?

  Size alone or size plus other criteria?
  Banks or bank holding companies?

What amount of SND should be required?

What characteristics should the required SND have?

  Tradability
  Market participants
  Maturity
  Call and put option features
  Fixed rates, floating rates, and rate caps

Frequency of issuance

A transition period

How should the requirements be enforced and SND information used?

  Examination and surveillance procedures
  Data requirements

The relation among SND policy, increased disclosure, and an improved Basel Accord

4. Conclusion

Appendixes

A.  Members of the Federal Reserve System Study Group on Subordinated Notes and Debentures 
B.  A Summary of Interviews with Market Participants 
C.  Avoiding Subordinated Debt Discipline 
D.  Macroeconomic Effects of Mandatory Subordinated Debt Proposals 
E.  Treatment of Subordinated Debt in Risk-Based Capital 
F.  The Argentine Experience with Mandatory Bank SND