Contingent Capital with Sequential Triggers
Wulf A. Kaal
University of St. Thomas, Minnesota - School of Law; European Corporate Governance Institute (ECGI)
Mississippi College - School of Law
49 San Diego Law Review, p. 49, p. 221, 2012
U of St. Thomas Legal Studies Research Paper No. 11-20
Mississippi College School of Law Research Paper No. 2012-01
Policy makers may not have fully utilized the potential of contingent capital. This article proposes the use of contingent capital with sequential triggers as an early preventative tool and as a reorganization tool before liquidation, independent of protection under bankruptcy proceedings. The first preventative trigger would convert a fixed amount of debt to equity at a stage when the institution is still sound on a micro prudential basis, but shows early signs of substantial weakening. The second reorganization trigger would increase voting rights for holders of contingent capital after conversion to equity at the reorganization stage. Sequential triggers could incentivize corrective actions by bank management. The second trigger introduces a quasi preparation stage for bankruptcy, independent of management decisions or corrective action by regulators. The proposal would work seamlessly with the regulatory framework proposed by the EU Commission and could provide U.S. policy makers with a new perspective on the multiple uses of contingent capital in the context of bank restructuring.
Number of Pages in PDF File: 59
Keywords: Dodd-Frank, contingent capital, financial crisis, securities, bankruptcy, bank restructuringworking papers series
Date posted: August 12, 2011 ; Last revised: October 15, 2012
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