Equity Recourse Notes: Creating Counter-Cyclical Bank Capital

Forthcoming, Economic Journal

43 Pages Posted: 11 Sep 2014 Last revised: 13 Aug 2015

See all articles by Jeremy Bulow

Jeremy Bulow

Stanford University; National Bureau of Economic Research (NBER)

Paul Klemperer

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 10, 2014

Abstract

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.

Keywords: bank capital, coco, contingent capital, contingent convertible bond, bail-in, bank, capital requirements, SIFI, debt overhang, regulatory capital

JEL Classification: G21, G32, G28, G10

Suggested Citation

Bulow, Jeremy I. and Klemperer, Paul, Equity Recourse Notes: Creating Counter-Cyclical Bank Capital (September 10, 2014). Forthcoming, Economic Journal. Available at SSRN: https://ssrn.com/abstract=2494159 or http://dx.doi.org/10.2139/ssrn.2494159

Jeremy I. Bulow

Stanford University ( email )

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Stanford, CA 94305-5015
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National Bureau of Economic Research (NBER)

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Paul Klemperer (Contact Author)

University of Oxford - Department of Economics ( email )

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Oxford, OX1 3BJ
United Kingdom
+44 1865 278 588 (Phone)
+44 1865 278 557 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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