A banking organization’s inability to issue subordinated debt under the cap would send a “red flag” to the market. Alternatively, the cap could be used to trigger supervisory action in the same way that a banking organization’s capital ratios currently trigger prompt corrective action.
The downside of a cap is that it would be difficult, perhaps in practice impossible, to determine the optimal rate or spread that should serve as a cap, particularly since the optimal cap would vary with bond market and macroeconomic conditions. A fixed cap might harshly punish all banking organizations unnecessarily when the bond market is highly illiquid.