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Countercyclical contingent capital (CCC): possible use and ideal design

Author

Listed:
  • Giuseppe De Martino

    ()

  • Massimo Libertucci

    () (Banca d'Italia)

  • Mario Marangoni

    () (Banca d'Italia)

  • Mario Quagliariello

    () (Banca d'Italia)

Abstract

Contingent capital � any debt instrument that converts into equity when a predefined event occurs � has received increasing attention as a viable tool for allowing banks to raise capital when needed at relatively more affordable prices than common equity. While the debate has focused on contingent capital for systemically important financial institutions, this paper concentrates on its possible use for covering capital needs arising from the implementation of countercyclical buffers. We propose the introduction of countercyclical contingent capital (CCC) based on a double trigger. The interaction of the two triggers would determine a quasi-default status. Conversion would be required when the financial system is simultaneously facing aggregate problems and the individual bank � while still in a going concern status � shows weaknesses. Building on this proposal, the paper tests how different double triggers would have worked in the past and discusses the optimal design of the conversion mechanism and prudential treatment.

Suggested Citation

  • Giuseppe De Martino & Massimo Libertucci & Mario Marangoni & Mario Quagliariello, 2010. "Countercyclical contingent capital (CCC): possible use and ideal design," Questioni di Economia e Finanza (Occasional Papers) 71, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_71_10
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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2010-0071/QEF_71.pdf
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    References listed on IDEAS

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    1. Pennacchi, George & Vermaelen, Theo & Wolff, Christian C. P., 2014. "Contingent Capital: The Case of COERCs," Journal of Financial and Quantitative Analysis, Cambridge University Press, pages 541-574.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    3. Francesco Cannata & Mario Quagliariello, 2005. "The Value of Market Information in Banking Supervision: Evidence from Italy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(2), pages 139-162, April.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    6. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
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    Citations

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    Cited by:

    1. Alessandro Giustiniani & John Thornton, 2011. "Post-crisis financial reform: where do we stand?," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(4), pages 323-336, November.
    2. Barucci, Emilio & Del Viva, Luca, 2012. "Countercyclical contingent capital," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1688-1709.

    More about this item

    Keywords

    Basel 2; capital buffer; procyclicality; contingent capital; financial crisis; reforms;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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