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REPORT TO CONGRESS ON STUDY OF A CONTINGENT CAPITAL REQUIREMENT FOR CERTAIN NONBANK FINANCIAL COMPANIES AND BANK HOLDING COMPANIES

REPORT TO CONGRESS ON STUDY OF A CONTINGENT CAPITAL REQUIREMENT FOR CERTAIN NONBANK FINANCIAL COMPANIES AND BANK HOLDING COMPANIES

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Published by Tom Johansmeyer
The FSOC's report on contingent capital. This should be interesting.
The FSOC's report on contingent capital. This should be interesting.

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Published by: Tom Johansmeyer on Jul 27, 2012
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07/27/2012

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R
EPORT TO
C
ONGRESS ON
S
TUDY OF A
C
ONTINGENT
C
APITAL
R
EQUIREMENTFOR
C
ERTAIN
N
ONBANK
F
INANCIAL
C
OMPANIES AND
B
ANK
H
OLDING
C
OMPANIES
 
F
INANCIAL
S
TABILITY
O
VERSIGHT
C
OUNCIL
 
Completed pursuant to Section 115(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
July 2012
 
2
Table of Contents
I. Executive Summary ................................................................................................................. 3II. Introduction ............................................................................................................................. 3a. Overview of Statutory Mandate and its Application in the Study ....................................... 3b. Definition of Contingent Capital ......................................................................................... 5c. Potential Benefits from and Drawbacks of the Use of Contingent Capital ......................... 5d. The Use of Contingent Capital by Insurance Companies .................................................... 6III. Structural Considerations ..................................................................................................... 6a. Conversion Features............................................................................................................. 6b. Host Instruments .................................................................................................................. 8c. Pricing .................................................................................................................................. 9d. Conversion Ratio ............................................................................................................... 10e. Triggers .............................................................................................................................. 11f. Tax, Accounting, and Legal Considerations ...................................................................... 16g. The Role of Ratings Agencies ........................................................................................... 18IV. Conclusions ........................................................................................................................ 19
 
3I.
 
Executive SummaryThe Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)
1
 requires the Financial Stability Oversight Council (Council) to submit a report to Congressregarding a study on the feasibility, benefits, costs, and structure of a contingent capitalrequirement for nonbank financial companies supervised by the Board of Governors of theFederal Reserve System (Federal Reserve) and for large, interconnected bank holding companies(BHCs). This report addresses statutory mandates for the study through a review of the typesand structures of contingent capital instruments and consideration of the potential benefits fromand drawbacks of the use of contingent capital, including its potential to enhance the safety andsoundness of nonbank financial companies supervised by the Federal Reserve and large,interconnected BHCs. In conclusion, the Council recommends that contingent capitalinstruments remain an area for continued private sector innovation, and encourages the FederalReserve and other financial regulators to continue to study the advantages and disadvantages of including contingent capital and bail-in instruments in their regulatory capital frameworks.II.
 
Introductiona.
 
Overview of Statutory Mandate and its Application in the StudySection 115(c) of the Dodd-Frank Act
2
requires
the Council’s
study to include:
 
an evaluation of the degree to which a contingent capital requirement for nonbank financial companies supervised by the Federal Reserve and large, interconnected BHCswould enhance the safety and soundness of companies subject to the requirement,promote the financial stability of the United States, and reduce risks to U.S. taxpayers(section 115(c)(1)(A));
 
an evaluation of the characteristics and amounts of contingent capital that should berequired (section 115(c)(1)(B));
 
an analysis of the potential prudential standards that should be used to determine whetherthe contingent capital of a company would be converted to equity in times of financialstress (section 115(c)(1)(C));
 
an evaluation of the costs to companies, the effects on the structure and operation of credit and other financial markets, and other economic effects of requiring contingentcapital (section 115(c)(1)(D));
1
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
2
12 U.S.C. 5325(c).

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