Explanation:
Option B is the false statement and therefore the correct answer. Duffie considers distress-contingent convertible debt (often known as CoCos) to be a stabilizing innovation. They are designed to automatically convert from debt to equity (or undergo a principal write-down) when a bank's capital falls below a certain threshold, thereby recapitalizing the firm precisely when it is experiencing financial distress. Therefore, Duffie would strongly disagree that they are destabilizing and should be curtailed. Options A, C, and D reflect views supported by Duffie regarding mitigating the systemic risks of dealer banks.
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809.3. Duffie examines several policy measures that might alleviate firm-specific and systemic risks related to large dealer banks. He would tend to agree with each of the following EXCEPT to which statement would he most DISAGREE?
A
The threat posed by the flight of over-the-counter derivatives counterparties can be lowered by central clearing
B
Distress-contingent convertible debt is an innovation that is likely to be destabilizing during periods of financial distress, and regulators should consider curtailing their usage
C
Short-term tri-party repos are a particularly unstable source of financing; potential remedies to their risk include a tri-party repo utility, central-bank insurance of tri-party repo transactions, or an emergency bank to be financed by repo market participants
D
The most important source of systemic risk is the potential impact of dealer-bank fire sales on market prices and investor portfolio; during the financial crisis, the risk of fire sales was significantly mitigated by lender-of-last resort financing by central banks and by capital injections into dealer banks
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