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

  • Giuseppe De Martino

    ()

  • Massimo Libertucci

    ()

    (Banca d'Italia)

  • Mario Marangoni

    ()

    (Banca d'Italia)

  • Mario Quagliariello

    ()

    (Banca d'Italia)

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.

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File URL: http://www.bancaditalia.it/pubblicazioni/qef/2010-0071/QEF_71.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 71.

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Date of creation: Sep 2010
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Handle: RePEc:bdi:opques:qef_71_10
Contact details of provider: Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, April.
  2. Pennacchi, George G. & Vermaelen, Theo & Wolff, Christian C, 2010. "Contingent Capital: The Case for COERCs," CEPR Discussion Papers 8028, C.E.P.R. Discussion Papers.
  3. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  4. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  5. Francesco Cannata & Mario Quagliariello, 2005. "The Value of Market Information in Banking Supervision: Evidence from Italy," Journal of Financial Services Research, Springer, vol. 27(2), pages 139-162, April.
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