Much has been written recently about a new development in the financial markets—the use of long-term debt by commercial banks. Historically, bank capital has been represented almost entirely by equity. In the past, the use of senior securities by banks was considered to be a sign of weakness. This connotation derived from the Banking Holidays of the early 1930’s when distressed banks were authorized to seek additional capital by issuing preferred stock and debentures. Most of these issues were bought by the Reconstruction Finance Corporation, a federal agency created in 1932 to render emergency financial assistance to American industries. This stigma formerly associated with the use of senior securities has now been substantially removed by the action of the Comptroller of the Currency, James J. Saxon, in promulgating new regulations permitting national banks to issue capital debentures.¹ As a result, long-term debt issues have become an increasingly popular financing device for commercial banks. Since the Comptroller’s action, more than 73 banks have sold close to $1 billion of senior securities.²

The published literature on this new development, with few exceptions thus far, deals primarily with the effects of leverage in the form of senior securities on a bank’s earnings, capital position, and cost of capital.³ That is to say, the analysis of the use of long-term debt has been conducted primarily from the viewpoint of a bank’s management and stockholders. Actually, there are several viewpoints from which this recent development can be examined: (1) the stockholder and management; (2) the regulatory authorities; and (3) the prospective investor. It is axiomatic that the attitudes of these interested parties do not necessarily coincide. It is from the last viewpoint—that of the prospective investor—toward which this paper is directed.