WASHINGTON Subordinated debt offerings by large financial institutions encourage market discipline and produce other supervisory benefits, a report issued Friday by federal regulators said.
The report, prepared by the Federal Reserve Board and the Treasury Department, recommended that bank and thrift regulators consider changing the prices of voluntarily issued subordinated debt when assessing the health of financial institutions.
There is evidence that this issuance provides some direct market discipline and transparency, the report said. Current voluntary issuance also has provided indirect market discipline insofar as private market participants and the supervisory agencies make use of subordinated debt prices in monitoring these organizations.
However, the report stopped short of recommending that Congress require institutions to issue subordinated debt. The net benefits of a mandatory policy over voluntary issuance are currently too uncertain to justify adopting a mandatory policy.
The 80-page report was required by the Gramm-Leach-Bliley Act of 1999 to determine whether requiring banks to issue subordinated debt would increase private-sector controls on bank risk taking.
The report called for continued research and evaluation of the examiners use of any information associated with subordinated debt offerings. Virtually all of the largest banks already issue subordinated debt, it said.