Contingent Capital: and The Princess Bride
A speaker whose talk I attended stated as a fact that it would be “inconceivable” for any bank to fail if banks adopted “contingent capital.” Under “contingent capital” the bank would sell debt instruments that would convert to equity under a specified “trigger.” The trigger would be the bank’s reported capital falling below some threshold that the speaker did not identify. The theoclassical theory is, as always, the creation of “private market discipline” to prevent bank failures.
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