Tucker sees use for CoCos

CONTINGENT capital instruments are potentially an important element in banks&rsquo; recovery plans and are a form of catastrophe insurance for the banking sector if they are widely adopted, the Bank of England&rsquo;s deputy governor Paul Tucker said yesterday.<br /><br />Speaking in Brussels, Tucker &ndash; whose remit at the Bank is financial stability &ndash; said that the recent financial crisis has shown that, in times of extreme financial turmoil, routine liquidity insurance will not always suffice. <br /><br />He added that there is the need for contingency planning in times of stress and the need for firms to take a leading role in producing recovery plans.<br /><br />Contingent capital bonds, also known as CoCos, would convert into common, loss-absorbing equity if a bank hit turbulence. <br /><br />Tucker said: &ldquo;The weaker a recovery plan and the greater the obstacles in the way of its effective resolution, the more capital and liquidity a bank is going to have to hold.&rdquo;<br /><br />&ldquo;This is why emerging interest in contingent capital instruments is so important. If CoCos could form a material part of recovery plans, the landscape might just be transformed,&rdquo; he explained. <br /><br />The practical use of CoCos has been questioned by critics, who fear that bond investors may be put off buying these securities because they are prohibited from owning equity. In the case of the debt being converted to equity, these investors would have to sell their holdings. <br /><br />But Tucker stressed that CoCos should be given further consideration by market participants.<br /><br />He added that the Bank of England was considering forcing banks to produce daily details of positions they hold in derivatives, which are usually banks&rsquo; most risky investments.<br />