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Countercyclical contingent capital (CCC): possible use and ideal design

Giuseppe De Martino (), Massimo Libertucci (), Mario Marangoni () and Mario Quagliariello ()
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Mario Marangoni: Banca d'Italia

No 71, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Contingent capital � any debt instrument that converts into equity when a predefined event occurs � has received increasing attention as a viable tool for allowing banks to raise capital when needed at relatively more affordable prices than common equity. While the debate has focused on contingent capital for systemically important financial institutions, this paper concentrates on its possible use for covering capital needs arising from the implementation of countercyclical buffers. We propose the introduction of countercyclical contingent capital (CCC) based on a double trigger. The interaction of the two triggers would determine a quasi-default status. Conversion would be required when the financial system is simultaneously facing aggregate problems and the individual bank � while still in a going concern status � shows weaknesses. Building on this proposal, the paper tests how different double triggers would have worked in the past and discusses the optimal design of the conversion mechanism and prudential treatment.

Keywords: Basel 2; capital buffer; procyclicality; contingent capital; financial crisis; reforms (search for similar items in EconPapers)
JEL-codes: G01 G18 G28 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-ban
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