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REPORT ON FEASIBILITY OF MANDATORY SUBORDINATED DEBT.

The Board of Governors of the Federal Reserve System and the Secretary of the Treasury found that subordinated debt issuance by large depository institution 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 and Office of Thrift Supervision (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, 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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Publication:Federal Reserve Bulletin
Article Type:Brief Article
Geographic Code:1USA
Date:Mar 1, 2001
Words:254
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