EQUITY RECOURSE NOTES: CREATING COUNTER-CYCLICAL BANK CAPITAL

We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which (i) ameliorate booms and busts by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times; (ii) help solve the too-big-to-fail problem; and (iii) reduce the regu...

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Bibliographic Details
Published in:The Economic journal (London) 2015-08, Vol.125 (586), p.F131-F157
Main Authors: Bulow, Jeremy, Klemperer, Paul
Format: Article
Language:English
Subjects:
Bank loans
Convertible bonds
Equity
FEATURE: FINANCIAL MARKET REFORM
Incentives
Studies
Online Access:Get full text
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Summary:We propose a new form of hybrid capital for banks, Equity Recourse Notes (ERNs), which (i) ameliorate booms and busts by creating counter-cyclical incentives for banks to raise capital, and so encourage bank lending in bad times; (ii) help solve the too-big-to-fail problem; and (iii) 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.
ISSN:0013-0133
1468-0297
DOI:10.1111/ecoj.12301