Equity Recourse Notes: Creating Counter-cyclical Bank Capital

Jeremy Bulow and Paul Klemperer

No 10213, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which ameliorate booms and busts by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times. They avoid the flaws of existing contingent convertible bonds (cocos)--in particular, they convert more credibly--so ERNs also help solve the too-big-to-fail problem: rather than forcing banks to increase equity, we should require the same or larger capital increase but permit it to be in the form of either equity or ERNs--this also gives some choice to those who claim (rightly or wrongly) that equity is more costly than debt. ERNs can be introduced within the current regulatory system, but also provide a way to reduce the existing system?s heavy reliance on measures of regulatory-capital.

Keywords: Bank; Bank capital; Capital requirements; Coco; Contingent capital; Contingent convertible bond; Bail-in; Sifi (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 G32 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban, nep-cta and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP10213 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Equity Recourse Notes: Creating Counter-Cyclical Bank Capital (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10213

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10213

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().