Observed risk premiums on subordinated debt could perhaps be used to help the FDIC set more accurate risk-based deposit insurance premiums, and such debt would provide an extra cushion of protection for taxpayers.
An additional benefit of having subordinated debt traded on the open market is that price movements would provide a clear signal of the market’s evaluation of the bank’s financial condition that, even if it were not used to help price deposit insurance, could serve as an early warning aid to supervisors. Subordinated debt is not, however, without its problems.