With the introduction of a non-viability trigger into bank subordinated debt at the beginning of this year, the market for such debt has changed, possibly forever. Apart from the problem of investment mandates that don't allow institutional investors to hold convertible debt, there is the problem of how to value the risk associated with the non-viability trigger being pulled.To date, no answer has been found.However, being eminently practical, the domestic banks have dealt with the problem by no longer trying to sell subordinated debt to institutional investors. Instead, they have sold it to retail investors, who don't ask difficult questions and only look at the yield.Nevertheless, professional markets will need to deal with the problem; it is just going to take a little longer.The non-viability trigger is part of the Basel Committee's post-GFC capital framework. Banks must include, in the terms of their additional tier one and tier two capital instruments, a condition that the instruments be written off or converted to ordinary equity should a trigger event occur. Broadly, a trigger event occurs when the bank requires support to avoid becoming non-viable.The International Swaps and Derivatives Association issued a statement last month outlining proposals dealing with the settling of credit default swap contracts on subordinated bank debt. ISDA intends to introduce new provisions in CDS contracts that will allow for bail-ins (whether through activation of a non-viability trigger or expropriation) to be events of default.ISDA is also proposing to modify the requirements on deliverability, when there are no eligible bonds left outstanding. CDS settlement will be based on the outstanding principal amount of the debt prior to the bail in. If the debt is written down to zero without any conversion proceeds, the CDS will effectively settle at a pre-determined fixed cash settlement amount of 100 per cent in favour of the CDS buyer. ISDA's action was prompted, in part, by the resolution imposed on creditors of the failed Dutch Bank, SNS Reaal, earlier this year. SNS Bank had bonds outstanding in this market as recently as late 2011.When the bank failed, the Dutch government simply expropriated the subordinated bonds of the bank. This left the former bond-holders who had CDS protection with two problems.Expropriation was not clearly covered as a credit event under the existing definition, and when it was decided that expropriation would be covered, bond-holders had no bonds to deliver for auction. As result, senior bonds were used instead but inevitably achieved much higher prices leaving the former subordinated bond-holders with significant losses on their CDS contracts.The new provisions proposed by ISDA should come into effect from March next year. At this time, the professional market will have the opportunity to explicitly put a price on this risk.It will be interesting to see the price differential that may emerge between senior and subordinated bank debt as a result of the changes. In the meantime, the chart below shows the ratio of subordinated CDS spreads to senior spreads, for ANZ.The ratio has ranged between 1.25 times the senior