REPORT ON FEASIBILITY OF MANDATORY SUBORDINATED DEBT.The Board of Governors of the Federal Reserve System Board of Governors of the Federal Reserve System The managing body of the Federal Reserve System, which sets policies on bank practices and the money supply. and the Secretary of the Treasury found that subordinated debt Subordinated Debt A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known as "junior security" or "subordinated loan". issuance by large depository institution Depository institution A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks and credit unions. organizations may encourage market discipline and generate other supervisory benefits. A joint report released on January 12, 2001, also indicated that the Board and the Treasury's Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (or OCC) was established by the National Currency Act of 1863 and serves to charter, regulate, and supervise all national banks and the federal branches and agencies of foreign banks in the United States. and Office of Thrift Supervision The Office of Thrift Supervision (OTS) was established as a bureau of the Treasury Department in August 1989 as part of a major Reorganization Plan of the thrift regulatory structure mandated by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) (12 U.S.C.A. (agencies) will consider ways to enhance their use of voluntarily issued subordinated debt in supervisory monitoring. The Board and the Secretary, however, chose not to recommend that the Congress make subordinated debt issuance mandatory at this time. The report to the Congress, required by the Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999), is an Act of the United States Congress which repealed the Glass-Steagall Act, opening up competition , called for continued research and, most important, continued evaluation of financial institution supervisors' experience in using information derived from voluntarily issued subordinated debt. Virtually all of the largest banking organizations already issue subordinated debt. The agencies monitor subordinated debt yields and issuance patterns in evaluating the condition of large depository institution organizations. The study found that existing evidence supports the use of subordinated debt to encourage market discipline. But it said that the net benefits of a mandatory policy are not clear enough to justify such a policy. Going forward, if additional evidence suggests that requiring institutions to issue subordinated debt is appropriate, either the Board or the Secretary may recommend legislation. Copies of the report, The Feasibility and Desirability of Mandatory Subordinated Debt, are available on the web sites of the Board, www.federalreserve.gov/ boarddocs/RptCongress/, and the Treasury Department, www.ustreas.gov. |
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