Strategic Policy Objectives in Privatizing the TBTF Backstop

For centuries most major economic crises in financially developed countries and principalities have been preceded and/or accompanied by financial crises—including waves of default and loss of capital—affecting banks and their counterparties. Over time, these crises and their disruption of financial intermediation and capital flows have spread far beyond their point of origin and afflicted entire regions, even the world economy. This has saddled policymakers with the task of guarding against and attempting to counteract financial crises of both foreign and domestic origin with the limited fiscal and monetary policy resources at their disposal. Cocos would be a useful addition to this arsenal because they could provide contingent capital infusions without undesirable side-effects or after-effects, although their sustainability through timely replacement after conversion remains a challenge. Continued issuance is likely to be least available for write-down-only cocos once they have left their holders badly burnt…