BOE’s Financial Policy Committee – split on Cocos?

Martin Taylor’s  speech, The fence and the pendulum of last week will probably achieve the same hype-status as Andrew Haldane’s The dog and the frisbee. While the latter is kind of naive in that it is hopeful of bank regulation (albeit less complex preferably), the former is anything but. Moreover, Taylor pulls no punches in lashing out against critics of ring-fencing*.

However, what I found very interesting is the … drum roll … end of the speech. It discusses Cocos.

Now, one member of the FPC may say something about Cocos, but there is the other member of the FPC, Mark Carney.

Mark Carney

He also happens to be the Chair of FSB, the organisation that some months ago published its TLAC proposal, which re-opens up the CoCo floodgates (after the Basel Committee almost completely shut them**).

Martin Taylor treads carefully as he expresses his worries cautiously, starting with,

I talk to a group like this about credit matters with the greatest timidity. I am sure you are good citizens and desire to exercise exemplary scrutiny. But I wonder whether you will flip – like the holders of European sovereign bonds before 2010 – from believing all issuers equally safe to thinking many equally precarious when the sky next darkens.

I worry that CoCos may be subject to potentially destabilising manipulation by convertible arbitrageurs,”

Fair enough, we all may worry at some point in time.

However, the last part of that sentence appears to directly aim at the FSB TLAC proposal: ” … which is why I think we should be careful how large a role we allow them to play.

Martin Taylor

He then masterfully concludes his point on CoCos: “I note that different kinds of investors are inclined to believe contradictory things. So at the same time that some equity investors claim that banks, in the interests of safety, are now forced to hold so much capital that they may struggle to earn proper returns, some debt investors can be heard to say that CoCos and bail-in debt are dangerous instruments to hold since banks are so precarious.

I don’t believe either of these propositions, as it happens, but I find it very difficult to see how anyone can believe both at once.

* See for example Blinded by Volcker, Vickers, Liikanen, Glass Steagall and Narrow Banking by Guynn, Randall D. and Kenadjian, Patrick, Structural Solutions:  (November 1, 2014). Available at SSRN:

* Basel III has a strong focus on Common Equity Tier 1 and allows banks to issue 1.5% Hybrids in Tier 1 and 2% subordinated debt in Tier 2.