Applying contingent capital in Canada

This article discusses a financial instrument – non-viability contingent capital (NVCC) – that could help policymakers manage distress at systemically important banks, and facilitate their resolution with less risk to taxpayers. The article sets out the motivation for, and key features of, NVCC. It also considers mechanisms that could be used to mitigate the risk of death spirals, which could be associated with such a convertible instrument. As well, with reference to the major Canadian banks, the article simulates the effects of converting NVCC into equity for the dilution of common stock at non-viability, and provides rates of recovery for common shareholders and NVCC investors, based on illustrative conversion formulas.