June 6, 2013 / 4:06 PM / 5 years ago

Fed's Plosser backs convertible debt for too-big U.S. banks

BOSTON (Reuters) - Forcing too-big-to-fail banks to hold more debt that converts to equity based on a market-based trigger is a wise way to better protect the U.S. financial system, a top Federal Reserve official said on Thursday.

In a speech, Philadelphia Fed President Charles Plosser largely repeated criticisms of current legislative efforts in the United States to end the problem of massive banks requiring government bailouts, as they did in the 2008 crisis.

He did not comment specifically on monetary policy, or the U.S. economic recovery from that crisis and the resulting recession.

Plosser again backed proposals by Fed regulation czar Daniel Tarullo and other bank supervisors for so-called systemically important financial institutions, or SIFIs, to hold more protective capital on their books.

Going a step further than his speech last month, Plosser said holding market-based contingent convertible bonds, or CoCos, would be the most efficient approach.

“My preference is to use a market-based trigger - for example, a trigger linked to the market value of the bank’s equity - and to set the trigger high enough so that the bank’s true economic capital remains positive when conversion is triggered,” Plosser, who has talked about regulation more this year, said according to prepared remarks at Boston College.

Such a trigger would react to the most current information about the bank and would be more transparent than one reliant on regulators’ discretion, he said.

“Setting the trigger high enough so that the bank’s net worth is still substantially positive reduces the likelihood of the need for bankruptcy or resolution,” Plosser added.

The landmark Dodd-Frank financial overhaul became law nearly three years ago. But the debate over too-big-to-fail banks, which are perceived as implicitly relying on taxpayers to bail them out no matter how risky their business conduct, has heated up in the last couple of months.

Reporting by Aaron Pressman; Writing by Jonathan Spicer; Editing by Chizu Nomiyama

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