Equity Recourse Notes: Creating Counter-Cyclical Bank Capital
Forthcoming, Economic Journal
43 Pages Posted: 11 Sep 2014 Last revised: 13 Aug 2015
Date Written: September 10, 2014
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: Suggested Citation