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.
For example, the risk preferences of such creditors are aligned with those of the FDIC only when the bank is clearly solvent. At or near insolvency, subordinated debt holders may be willing to “bet the bank” in order to increase the chances that they will not suffer a loss.