Jay! A public radio station in the Netherlands gave me some air-time to discuss CoCos

A Dutch public radio station asked me to comment on Contingent Convertible capital (in Dutch). My comments were in line with previous posts on CoCos: they tend to end in tears.

Thanks Stefan Heijdendael, the main investigator and reporter, for explaining CoCos very well.

On TLAC: Also thanks for anticipating on TLAC rules from the FSB. Governments and interested parties may still have time to influence the FSB’s TLAC proposals.

My comment on the FSB’s proposal was that regulators have an important responsibility: when they announce TLAC requirements of 16%-20% of RWA or twice the leverage ratio requirement, then banks will respond in a race to the top fashion to such announcements. They will start issuing TLAC instruments, often hurriedly, which then drives up the costs of TLAC instruments. This goes at the expense of banks’ cash flows: exactly not desirable from a prudential point of view. Banks should not waste cash on over-insuring the damages of failure.

On contractual versus statutorily CoCo rules. My other comment was on the way countries implement rules for CoCos. Probably the least desirable approach is to regulate little, i.e. allow banks to freely write CoCo contracts. This makes CoCos complex, as every CoCo contract will be unique.

Germany realises that complexity is undesirable and recently drafted rules that regulate CoCos statutorily (instead of contractually). The German initiative deserves wide following, as it would streamline the conversion of CoCo instruments and it would streamline the implementation of TLAC proposals.

Against the background of the German TLAC initiative, it is interesting to see how the Dutch supervisor responds. Stefan tried and asked DNB for comments. Alas to no avail. However, this week, the Dutch supervisor presented its financial stability report, which announces its position regarding TLAC in the chapter on Too big to fail. There, the financial stability report signals a preference of for structural and contractual solutions, not statutory. It will be interesting to see how this plays out over time. My guess is that DNB’s financial stability report was already in press when Germany announced its TLAC initiative.

The irony of the tax benefits of CoCos. The documentary highlights the tax benefits that many countries offer to CoCo issuers, which is depressing: where CoCos receive state support, public radio stations suffer as a result of austerity. So much for lessons learnt from the crisis.

Following on from the radio documentary, the Telegraaf, the largest news paper in the Netherlands quotes me as a “leading economist.”

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