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 http://www.bankofcanada.ca/en/speeches/2010/sp100610.htmlMr. 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?