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Federal Reserve Bank
of Dallas


February 28, 2001
Notice 01-21

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

Report on Feasibility of
Mandatory Subordinated Debt
The Board of Governors of the Federal Reserve System and the Secretary of the
Treasury have released a report on the feasibility of mandating the issuance of subordinated debt.
The joint report, dated December 2000, found that subordinated debt issuance by large depository institution organizations may encourage market discipline and generate other supervisory
benefits. The report also indicated that the Board and the Treasury’s Office of the Comptroller of
the Currency and Office of Thrift Supervision 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 Congress make subordinated debt issuance mandatory at this
The report to Congress, required by the Gramm-Leach-Bliley Act, called for continued research and, most importantly, continued evaluation of financial institution supervisors’
experience in using information derived from voluntarily issued subordinated debt. Most 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
The study found that existing evidence supports the use of subordinated debt to
encourage market discipline. However, it said that the net benefits of a mandatory policy are not

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.


clear enough to justify such a policy. If additional evidence suggests that requiring institutions to
issue subordinated debt is appropriate, either the Board or the Secretary may recommend legislation.
A copy of the report is available on the Board’s web site at
For more information, please contact Dorsey Davis, Banking Supervision Department, at (214) 922-6051. For additional copies of this Bank’s notice, contact the Public Affairs
Department at (214) 922-5254 or access District Notices on our web site at