{"id":9769,"date":"2010-02-19T14:12:47","date_gmt":"2010-02-19T18:12:47","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=9769"},"modified":"2010-02-19T14:12:47","modified_gmt":"2010-02-19T18:12:47","slug":"bocs-longworth-supports-contingent-capital","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=9769","title":{"rendered":"BoC's Longworth Supports Contingent Capital"},"content":{"rendered":"

David Longworth, Deputy Governor of the Bank of Canada, delivered a speech to the C D Howe Institute, Toronto, 17 February 2010, titled Bank of Canada liquidity facilities \u2013 past, present, and future<\/a>. It’s a good review of the actions taken by the BoC during the credit crunch to address liquidity problems, albeit lamentably short of meat.<\/p>\n

For instance, he emphasizes the importance of penalty rates in avoiding moral hazard:<\/p>\n

Fifth, and finally, the Bank should mitigate the moral hazard of its intervention. Such measures include limited, selective intervention; the promotion of the sound supervision of liquidity-risk management; and the use of penalty rates as appropriate.<\/p><\/blockquote>\n

but nowhere attempts to quantify the penalties that were actually applied.<\/p>\n

One of the things that scares me about the regulatory response to the crisis is the central counterparty worship. Mr. Longworth lauds the BoC’s role in:<\/p>\n

Encouraging and overseeing the implementation of liquidity-generating infrastructure, such as a central counterparty for repo trades, that help market participants self-insure against idiosyncratic shocks<\/p><\/blockquote>\n

Central counterparties reduce the role of market discipline in the interbank marketplace by offering a third party guarantee of repayment; I can therefore lend a billion to Dundee Bank with the same confidence that I lend to BNS. Additionally, they soak up bank capital; the counterparty has to be capitalized somehow and it may be taken as a given that the total bank capital devoted to the maintenance of the central counterparty will be greater than the bank capital devoted to the maintenance of a distributed system. Finally, while I agree that a central counterparty will decrease the incidence of systemic collapse, I assert that it will increase the severity; I claim that basic engineering good practice will seek to reduce the incidence of catastrophic single point failure, not increase it!<\/p>\n

He also addressed the headline issue, noting the potential for:<\/p>\n

Requiring the use of contingent capital or convertible capital instruments, perhaps in the form of a specific type of subordinated debt, to help ensure loss absorbency and thus reduce the likelihood of failure of a systemically important institution.<\/p>\n

Footnote: The BCBS press release of 11 January 2010 entitled, \u201cGroup of Central Bank Governors and Heads of Supervision reinforces Basel Committee reform package,\u201d announces that the \u201cBasel Committee is reviewing the role that contingent capital and convertible capital instruments could play in the regulatory capital framework.\u201d See also \u201cConsiderations along the Path to Financial Regulatory Reform,\u201d<\/a> remarks by Superintendent Julie Dickson, Office of the Superintendent of Financial Institutions, 28 October 2009<\/i><\/p><\/blockquote>\n

I have added a link in the above to the PrefBlog review of the Dickson speech; I will attend to the BIS press release shortly.<\/p>\n

Most of the commentary I’ve seen discusses contingent capital solely as the concept applies to subordinated debt; I will assert that logically, if the subordinated debt is liable to become common equity, then more junior elements of capital such as preferred shares must also have this attribute.<\/p>\n","protected":false},"excerpt":{"rendered":"

David Longworth, Deputy Governor of the Bank of Canada, delivered a speech to the C D Howe Institute, Toronto, 17 February 2010, titled Bank of Canada liquidity facilities \u2013 past, present, and future. It’s a …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[32],"tags":[],"class_list":["post-9769","post","type-post","status-publish","format-standard","hentry","category-contingent-capital"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/9769","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9769"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/9769\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9769"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9769"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9769"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}