The government should require large banks to issue subordinated debt at least once a year and mandate more disclosures to encourage more market discipline of the banking system, a Federal Reserve Board governor said Monday.
"We ought, where we can, to skip the middlemen and go right to our first line of defense: market discipline," Fed Governor Laurence H. Meyer said at a conference in New York on reforming bank capital standards. "It is perhaps the most flexible option for maintaining bank safety and soundness in a rapidly evolving environment and has the potential to strengthen and complement bank supervision."
Mr. Meyer said he favors using bondholders of subordinated debt as watchdogs because they are the least likely to be bailed out in the event of a bank failure and have the most incentive to rein in risky activities.
To aid these bondholders, the government should make banks disclose more about their risk exposures and internal capital assessments, Mr. Meyer said.
He added that information from secondary markets could be used to time exams, limit activities, or raise capital requirements.