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Contingent Capital with Sequential Triggers

59 Pages Posted: 12 Aug 2011 Last revised: 15 Oct 2012

Wulf A. Kaal

University of St. Thomas, Minnesota - School of Law

Christoph Henkel

Mississippi College - School of Law

Date Written: 2011

Abstract

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.

Keywords: Dodd-Frank, contingent capital, financial crisis, securities, bankruptcy, bank restructuring

Suggested Citation

Kaal , Wulf A. and Henkel, Christoph, Contingent Capital with Sequential Triggers (2011). 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. Available at SSRN: https://ssrn.com/abstract=1908473 or http://dx.doi.org/10.2139/ssrn.1908473

Wulf Kaal (Contact Author)

University of St. Thomas, Minnesota - School of Law ( email )

MSL 400, 1000 La Salle Avenue
Minneapolis, MN Minnesota 55403-2005
United States

Christoph Henkel

Mississippi College - School of Law ( email )

151 East Griffith Street
Jackson, MS 39201
United States

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