Lord Turner of the UK Financial Services Authority made a speech on Nov. 2 to the Turner Review Conference titled Large systemically important banks: addressing the too-big-to-fail problem:
Clearly we can and must reduce the probability of failure of large systemically important banks (Slide 6) and our key lever to achieve that is the capital and liquidity requirements we impose. In the past, as I have shown, we actually allowed larger banks to operate with slightly lower capital requirements: we need to reverse that approach. We are committed to higher capital across the whole banking system, but there is also a strong case for demanding higher still capital standards from our largest systemically important banks.
That could mean more quantity of capital in total, or a higher quality capital, a higher proportion of equity rather than debt. One of the defining characteristics of the ‘too-big-to-fail’ problem has been our unwillingness, for fear of systemic consequences, to impose any losses on debt capital, even though it is meant to be there to absorb losses. This clearly creates a moral hazard danger for the future. One obvious solution is therefore to accept that debt capital has little or no role in the required capital of large systemically important banks, addressing the moral hazard problem by increasing the commitment of equity, the element in the capital structure which investors clearly recognise will suffer loss in any rescue.
Or, to create a role for contingent capital, debt capital which will without doubt convert to equity if the equity ratio falls below a predefined level – effectively defining in advance the terms of a debt-to-equity swap.
These capital regime reforms are now being considered by the Basel Committee and the FSB, and will themselves make a very major contribution to addressing the ‘too-big-to-fail’ problem. Essentially, such measures amount to a tax on size or on other measures of systemic importance. If despite them, large and complex banks remain competitive, that is fine because they will be safer: if in response banks choose to remain smaller and simpler, that is fine also.
… but as Anousha Sakoui of the Financial Times reports in An experiment in the role of contingent capital:
“The FSA is no doubt rubbing its hands in a satisfied manner but there is a question over whether the ECNs will fly commercially,” said one regulatory specialist. “Investors are already nervous about bank exposure and this will not make them any less nervous. It is a silver bullet for regulators, but only if the market agrees.”
“ECN” [Enhanced Capital Note] is the nerd nomenclature for contingent capital. I have argued, most recently in the post Lloyds Contingent Capital Poorly Structured, that rational, non-coerced, buyers will demand a coupon so high that rational sellers won’t want to pay it … which is why it’s so important to get it into the indices – passive investors will buy ANYTHING, as long as you promise not to make them think about it.
John Palmer, head of OSFI from 1994-2001, has been appointed to the MFC board of directors. His successor, Nicholas Le Pan, is a director of CIBC. His predecessor, Michael Mackenzie, was on the board of ING Canada.
PerpetualDiscounts put in a solid day’s work today, gaining 24bp, while FixedResets lost 7bp. Strength in the BAM OperatingRetractibles more than offset a decline by GWO.PR.X, which was called for redemption. Volume continued to be on the lightish side.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2677 % | 1,483.3 |
| FixedFloater | 6.70 % | 4.73 % | 47,039 | 17.87 | 1 | 0.1235 % | 2,323.8 |
| Floater | 2.63 % | 3.11 % | 93,683 | 19.43 | 3 | 0.2677 % | 1,853.1 |
| OpRet | 4.81 % | -7.31 % | 118,588 | 0.09 | 14 | 0.1532 % | 2,302.1 |
| SplitShare | 6.34 % | 6.46 % | 414,785 | 3.91 | 2 | 0.5716 % | 2,086.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1532 % | 2,105.1 |
| Perpetual-Premium | 5.88 % | 5.77 % | 72,931 | 1.17 | 4 | -0.0345 % | 1,862.2 |
| Perpetual-Discount | 5.93 % | 5.97 % | 190,257 | 13.92 | 70 | 0.2365 % | 1,747.8 |
| FixedReset | 5.52 % | 4.16 % | 408,875 | 3.98 | 41 | -0.0737 % | 2,114.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.M | FixedReset | -2.26 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.40 Bid-YTW : 4.59 % |
| GWO.PR.X | OpRet | -2.26 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2010-10-30 Maturity Price : 25.67 Evaluated at bid price : 26.00 Bid-YTW : 3.84 % |
| CM.PR.K | FixedReset | -1.44 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.03 Bid-YTW : 4.41 % |
| BAM.PR.M | Perpetual-Discount | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 17.92 Evaluated at bid price : 17.92 Bid-YTW : 6.73 % |
| BAM.PR.O | OpRet | 1.10 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.82 Bid-YTW : 4.20 % |
| CU.PR.A | Perpetual-Discount | 1.33 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-03-31 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : 5.72 % |
| MFC.PR.B | Perpetual-Discount | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 19.79 Evaluated at bid price : 19.79 Bid-YTW : 5.97 % |
| BAM.PR.N | Perpetual-Discount | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 17.74 Evaluated at bid price : 17.74 Bid-YTW : 6.80 % |
| BNA.PR.C | SplitShare | 1.55 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 19.61 Bid-YTW : 7.84 % |
| GWO.PR.I | Perpetual-Discount | 1.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 19.13 Evaluated at bid price : 19.13 Bid-YTW : 5.97 % |
| BMO.PR.J | Perpetual-Discount | 2.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 20.15 Evaluated at bid price : 20.15 Bid-YTW : 5.60 % |
| BAM.PR.J | OpRet | 2.17 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 25.85 Bid-YTW : 5.01 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.P | FixedReset | 71,850 | Macquarie (who?) sold a block of 40,000 to Scotia at 26.55, and a block of 16,200 to RBC at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-03-27 Maturity Price : 25.00 Evaluated at bid price : 26.48 Bid-YTW : 4.11 % |
| SLF.PR.D | Perpetual-Discount | 62,257 | Nesbitt crossed 49,200 at 18.53. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 18.62 Evaluated at bid price : 18.62 Bid-YTW : 6.06 % |
| CM.PR.L | FixedReset | 46,412 | Macquarie sold blocks of 18,900 to Nesbitt and 20,000 to RBC, both at 27.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 27.53 Bid-YTW : 4.13 % |
| RY.PR.A | Perpetual-Discount | 45,120 | Desjardins crossed 25,000 at 19.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 19.45 Evaluated at bid price : 19.45 Bid-YTW : 5.74 % |
| TRP.PR.A | FixedReset | 39,406 | YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 4.41 % |
| BAM.PR.N | Perpetual-Discount | 36,329 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2039-11-05 Maturity Price : 17.74 Evaluated at bid price : 17.74 Bid-YTW : 6.80 % |
| There were 34 other index-included issues trading in excess of 10,000 shares. | |||