Wall Street has discovered a new outlet for bank debt: the individual investor.

Three New York money-center banks have sold about $500 million of medium-term notes to retail investors in the past year, saving up to 25 basis points off the cost of more traditional issuance to institutional investors.

The programs mark the first time banks have sold subordinated debt on the retail market, said Ted Hamilton, a director at Smith Barney.

Smith Barney has launched retail note programs to sell up to $500 million apiece for Citicorp and Chemical Banking Corp. and $200 million for Chase Manhattan Corp.

It recently began marketing the financial instruments to a broader group of institutions under the registered service mark "Retail Medium-Term Note Securities."

Mr. Hamilton estimated the potential size of the market to be "huge," perhaps rivaling those for fixed income funds, bond funds, or unit investment trusts.

The new investor category is being tapped just when many banks are considering plans to sell more subordinated debt, noted Thomas G. Stone, vice president at Duff & Phelps Credit Rating Co..

To qualify as "well-capitalized" banks must maintain total capital equal to 10% of assets, weighted for risk, including 6% of tier 1 capital, largely consisting of equity.

Mr. Stone said many banks today are seeking a more efficient mix of capital, and are considering replacing some of their Tier 1 equity capital with subordinated debt, which qualifies as Tier 2 capital.

So far the retail medium-term note securities, including a $150 million offering completed for Occidental Petroleum Corp. has been sold to 30,000 individuals. The average transaction size is $18,000.

Mr. Hamilton said the debt is being marketed like certificates of deposit, but offers yields on obligations of stable banking companies of around 7% - compared to a roughly 6% yield on a federally insured five-year CD.

At the same time, he said, the issuer enjoys a lower cost than in the institutional marketplace.

"It's been a very successful program for Citicorp," said one official at the bank, estimating that $300 million has been raised so far.

The banker said the program is "the logical extension of the retail preferred market." The preferred stock has been marketed to the retail marketplace, but this is the first time "true fixed income" securities have been sold to "mom and pop investors," he said.

Especially attractive from Citicorp's point of view are the relatively inexpensive call options. "Institutional investors are better equipped to value the options," the banker said. In the retail market "we don't have to pay up as much for the true value of the option."

Those seeking a monthly income stream - including individuals - are most likely to benefit from the retail medium-term notes. Potential investors also could include individual tax advantaged accounts such as such as IRAs and Keoghs.

Smith Barney sells the notes either by posting rates throughout the week and fulfilling orders that come in, or by buying $10 million to $50 million of debt at a time and selling it off in smaller pieces to individuals.

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Barnett Banks Inc. brought $100 million in three year medium term notes to market on Tuesday.

The notes are due July 28, 1998, and are priced to yield 6.356%.

The noncallable notes are priced at a spread of 30 basis pints over Treasuries.

CS First Boston led the underwriting for the issue.

Selling concession is $1.25 and reallowance is $1.

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