Equity Recourse Notes: Creating Counter‐Cyclical Bank Capital

27 Pages Posted: 20 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)

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Date Written: August 2015

Abstract

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.

Suggested Citation

Bulow, Jeremy I. and Klemperer, Paul, Equity Recourse Notes: Creating Counter‐Cyclical Bank Capital (August 2015). Feature Issue, Vol. 125, Issue 586, pp. F131-F157, 2015. Available at SSRN: https://ssrn.com/abstract=2647127 or http://dx.doi.org/10.1111/ecoj.12301

Jeremy I. Bulow (Contact Author)

Stanford University ( email )

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Paul Klemperer

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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