Board of Governors of the Federal Reserve System, Staff Study 172: Using211 Subordinated Debt as an Instrument of Market Discipline

摘要

Since the mid-1980s a growing number of observers, both within and outside the211u001ebank regulatory agencies, have proposed using subordinated notes and debentures 211u001e(SND) to increase market discipline on banks and banking organizations. The 211u001eperceived need for more-effective market discipline has continued to receive 211u001eattention, even after implementation of the reforms contained in the FDIC 211u001eImprovement Act (FDICIA) of 1991, in part because of the increasing size and 211u001ecomplexity of banking organizations and in part because of the desire to lower 211u001ethe potential vulnerability of the banking and financial system to systemic risk. 211u001eIndeed, market discipline has become one of the three 'pillars'-along with 211u001eimproved capital standards and more risk-based supervision-of the Federal 211u001eReserve's approach to bank supervision and regulation. In light of the ongoing 211u001einterest in using SND as an instrument to augment market discipline, staff of the 211u001eFederal Reserve System undertook a study of the issues surrounding an SND policy. 211u001eThis study presents the results of the staff's work. The study proceeds as 211u001efollows. Section 1 defines market discipline, discusses the motivation for and 211u001etheory behind an SND policy, and summarizes existing policy proposals. Section 2 211u001esummarizes and reviews the economic literature on the potential for SND to exert 211u001emarket discipline on banks. It also presents a wide range of new evidence 211u001eacquired by the study group. Section 3 analyzes many characteristics that an SND 211u001epolicy could have, in terms both of their contribution to market discipline and 211u001eof their operational feasibility. The final section provides a brief conclusion.