Financial Stability Paper No 16: Precautionary contingent capital

The financial crisis showed that levels and quality of bank capital were too low for banks to be able to absorb the losses they faced. Policymakers have responded by increasing the amount of equity all banks are required to have in their capital structures and imposing additional equity requirements on those banks considered to be globally systemically important. Contingent capital has been put forward by some as another way of potentially enhancing the resilience of banks. Several contingent capital instruments have been issued and some authorities have proposed that banks could issue such instruments to meet certain regulatory requirements. This paper takes stock of the current debate about contingent capital. The various possible designs of contingent capital are described and the key potential systemic risk implications of these instruments are highlighted. The paper suggests the considerations any policymaker would need to make if considering in future whether contingent capital is an appropriate means of ensuring banks’ resilience.