Carney: Ban the Bond!

Mark Carney, Governor of the Bank of Canada, gave a speech to the International Organization of Securities Commissions (IOSCO) meeting, Montreal, 10 June 2010. I was stunned by suggestion regarding contingent capital:

One promising avenue is to embed contingent capital features into debt and preferred shares issued by financial institutions. Contingent capital is a security that converts to capital when a financial institution is in serious trouble, thereby replenishing the capital of the institution without the use of taxpayer funds. Contingent conversions could be embedded in all future new issues of senior unsecured debt and subordinated securities to create a broader bail-in approach. Its presence would also serve as a useful disciplinary device on management since common shareholders would be incented to act prudently and avoid having their stake in the institution diluted away by the prospect of conversion.

New issues of senior unsecured debt???

Such an unprecendented proposal should be made only in the context of some very lengthy arguments in favour of the advisability of such an incredible change.

Contingent Capital may be a good thing, but it is not a bond! If I own a bond and you’re late paying me, I can put you in bankruptcy. If this is not true – as with CC – then it wasn’t a bond.

And Carney wants all senior unsecured debt to be contingent? To get an idea of the scope of this revolutionary idea, have a look at Table 54a of RY’s 2009 Annual Report: it shows that senior unsecured bonds outstanding amounted to $69.8-billion dollars. This compares to $39.6-billion in shareholders’ equity (including preferred shares).

In making such a suggestion without publishing a scrap of research into Canadian contingent capital; without making any qualifications; and without, in fact, doing much else at all, Mr. Carney has shown himself to be unfit to continue as Governor of the Bank of Canada.

Update: I have sent the following eMail to the BoC:

I refer to Mark Carney’s remarks to the IOSCO conference, published on your website at

Mr. Carney spoke approvingly of the potential for “all future new issues of senior unsecured debt” to become contingent capital.

I am not aware that anybody, anywhere, has made such a proposal. Has the Bank of Canada published any research whatsoever on the probable effects of such a revolutionary change in capital markets? Is the Bank of Canada aware of any such research?

11 Responses to “Carney: Ban the Bond!”

  1. GAndreone says:

    James, look at the plus side. It makes all of the pref shares you now own much more valuable!

  2. […] authors did not mention Carney’s notion to ban the bond. They’re going to get their knuckles […]

  3. […] have complained in the past, Canada’s efforts to provide a coherent plan have been limited to an off-the-cuff remark from the Central Bank together with an intellectually dishonest speech and childish essay by the head of bank regulation. […]

  4. GAndreone says:


    In the past, you have indicated that you find the ability to force a Bond issuer into bankruptcy as a useful tool to make sure payments are made on time.

    1) In real life, how often are threats of bankruptcy to the issuer used to force payments?

    2) In real life, how often are the threats actually acted upon?

  5. jiHymas says:

    1) About as often as threats of foreclosure are used to ensure mortgage payments are made on time. It’s always there in the background. It doesn’t need to be explicit.

    2) Equal to the bankruptcy rate. In bankruptcy proceedings, bondholders are given all kinds of power by the courts and management, on behalf of shareholders, become a lot more willing to deal with that hanging over their heads. The last big public incident that I recall was the CIT Group prepackaged bankruptcy.

    Legal rights of this nature are like the police. If you are an average, law-abiding citizen, you’ve probably only spoken with the police on a serious matter a few times in your life. But if there were no police … boy, would you ever miss them!

  6. […] significant, and possibly what Carney’s Ban the Bond speech was all about. In other words, our esteemed leaders want to bypass bankruptcy courts and degrade […]

  7. […] The Bank of Canada continues to display either its arrogance or ignorance (you pick) by refusing to answer my query regarding Carney’s Ban the Bond speech. […]

  8. […] proposed inclusion of senior debt as a form of contingent capital has been discussed in the post Carney: Ban the bond!. As has been often discussed on PrefBlog, this is simply a mechanism whereby bureaucrats can be […]

  9. […] Carney will be pleased: he’s been urging the elimination of bondholder rights for some […]

  10. […] of Canada Governor Mark “Ban the Bond” Carney continued his crusade for Central Planning yesterday, with a speech titled Housing in […]

  11. […] is no clarity yet, the budget announcement is probably a signal that the feds have bought into the Ban the Bond Movement and that soon all bank bonds will be contingent capital; hey, who needs bankruptcy law […]

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