Banks should be required to issue subordinated debt equal to 10% of their liabilities, William Poole, former president and CEO of the Federal Reserve Bank of St. Louis, said today at the CFA Institute’s annual conference.
Banks would issue 10-year notes that are uncollateralized and subordinated to other debt obligations and would be in addition to existing capital requirements, said Mr. Poole, who now is a senior fellow at the Cato Institute and a distinguished scholar in residence at the University of Delaware, Newark.
Such debt would add to banks’ capital cushions and would submit banks to more market discipline than under the Obama administration’s current bailout program. Banks would be forced to issue debt every year, rolling over previous obligations. Banks unable to sell such debt would be forced to shrink, he said at the Orlando, Fla., conference.
He said the idea has been advanced by economists since the 1980s.
To make the transition, the federal government would move away from its current approach of buying bank equity and instead would purchase the subordinated debt. Starting in two years, subsequent debt issues would be sold on the open market, replacing the government-owned debt as it matured.
Mr. Poole said the subordinated debt proposal also would put some bank creditors at risk and would move the country away from a “too-big-to-fail” approach.
The government’s current bailout approach is “an affront to the market and an affront to democracy,” he said.
