Equity Recourse Notes: Creating Counter-cyclical Bank Capital

Journal article

We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which (1) ameliorate booms and busts by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times; (2) help solve the too-big-to-fail problem; and (3) reduce the regulatory system’s reliance on accounting measures of capital. ERNs avoid the flaws of existing contingent convertible bonds (cocos)--in particular, they convert more credibly. Future required increases in bank-capital should be permitted to be in the form of either equity or ERNs

Authors: Bulow, J; Klemperer, P

• Publication status: Accepted
• Peer review status: Under review
• Publisher: Wiley
• Journal: Economic Journal
• Acceptance date: 2015-04-03
• EISSN: 1468-0297
• Language: English
• Keywords: SIFI; bail-in; capital requirements; bank capital; bank; contingent convertible bond; coco; contingent capital
• Subjects: Economics