Are You Ready for the Bank Sub Debt Tsunami?

From January 2010 to June 30, 2025, banks and bank holding companies (BHCs) issued over $200 billion of subordinated debt (sub debt) in 980 separate offerings. A notable chunk of this—$45 billion—was concentrated in the short period from late 2020 through 2022 as these companies sought to take advantage of pandemic-era near-zero interest rates and a flood of investors seeking any meaningful yield. 

All Bank Sub Debt Issuance by Year

($ in millions, 2010 - 2025)

Sources:  S&P Global, Klaros Capital Research

Why start with 2010? Prior to the global financial crisis, Trust Preferred Securities (TruPS) were eligible debt-like capital instruments under regulatory capital rules. Banks and BHCs routinely issued them as a way to optimize their cost of capital. In the wake of the global financial crisis, the Dodd-Frank Wall Street Reform and Protection Act (“Dodd-Frank”) reclassified TruPS to be ineligible under regulatory capital requirements. Bank and BHC sub debt remained eligible under the rules. Inevitably, the bank sub debt market emerged in lieu of TruPS, offering many of the same advantages to issuers. Sub debt qualifies as tier 2 capital at the issuer level, which BHCs find desirable to issue and downstream to their banking subsidiaries as common equity capital to fund lending and other value-enhancing activities.  

For more on how we got here, see “Why Does the Difference Between U.S. Bank and Bank Holding Company Capital Requirements Drive the Issuance of Subordinated Debt?”

To qualify as regulatory capital, among other requirements, sub debt must have a minimum maturity of at least five years. In the last five years leading up to maturity, regulatory capital credit is haircut annually by 20% of the original amount of capital credit. In direct response to the regulations, the terms of most bank and BHC sub debt have evolved to include: (i) a ten-year maturity, callable after five years (10YrNC5), and (ii) a fixed coupon for the first five years, switching to a floating rate coupon (calculated as a defined spread to a base rate) in years six through ten. In this way, post-Dodd-Frank, typical bank sub debt is structured to have an effective life as an efficient capital instrument of only five years despite having a final maturity of 10 years, with compelling incentives to refinance after the fifth year when the coupon floats and the instrument begins to lose capital treatment (see Klaros Blog on bank holding company and bank capital ratios)

Banks may choose to call and retire their outstanding sub debt before or after these incentives kick in at year five. The sudden and unexpected near-zero rates during the pandemic caused most banks and BHCs to issue sub debt in a very concentrated 18-month period beginning in July of 2020. The confluence of the level of pandemic-era issuance and the structural incentives of both the fixed-to-floating coupon and capital phase-out embedded in the instrument means that a meaningful portion of the $45 billion issued during the pandemic will be refinanced over the next couple of years. That wave of sub debt refinancings is just beginning to reach the market.   

To put this in perspective, let's say half (or ~$22.5 billion) is refinanced and the average issuance is between $60 and $100 million. That translates into ~200-300 issuances over the next two years! Of course, investment bankers, attorneys, rating agencies, and investors met the moment back in 2020-2022, but the regulatory and economic landscape is dramatically different now. Are we all ready this time? And what happens if the sub debt ecosystem does not function efficiently for any number of exogenous reasons, causing credit spreads to widen: will loan growth be negatively affected? Will bank valuations be impacted?