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After the FloodHow the Great Recession Changed Economic Thought$
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Edward L. Glaeser, Tano Santos, and E. Glen Weyl

Print publication date: 2017

Print ISBN-13: 9780226443546

Published to Chicago Scholarship Online: September 2017

DOI: 10.7208/chicago/9780226443683.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2019. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 October 2019

How to Implement Contingent Capital

How to Implement Contingent Capital

Chapter:
(p.73) Chapter Four How to Implement Contingent Capital
Source:
After the Flood
Author(s):

Albert S. Kyle

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226443683.003.0004

For the purpose of strengthening bank capital, contingent capital offers two advantages over higher common stock requirements: (1) It is less sensitive to information than common stock. (2) Its owners can independently monitor the bank when they are separate from common stock owners. This paper proposes a specific structure for contingent capital securities which emphasizes the market discipline provided by the contingent capital holders’ threat not to roll over maturing securities. To deal with the possibility that contingent capital holders and common stockholders collude, the proposed structure includes multiple conversions triggers based on both market prices and regulatory calculations. It includes features which encourage a bank to retain cash and to raise capital when its balance sheets is weak. It avoids “death spiral” effects with a fixed conversion rate.

Keywords:   contingent capital, COCO, bank capital, convertible preferred stock

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