kaal:claim:1908473-016

By internalizing the costs of bank failure, contingent capital can reduce moral hazard, and because a contingent debt security with a conversion trigger would presumably not default, it helps avoid contagion and systemic spillovers.

By internalizing bank failure costs, contingent capital may contribute to minimizing moral hazard. A contingent debt security with a conversion trigger would presumably not default and could thus help avoid contagion and systemic spillover effects, which in turn may limit systemic risk.

Wulf A. Kaal, Christoph Henkel, Contingent Capital with Sequential Triggers (2011), II.A. Potential for Reform and Financial Stability, p. 17
https://ssrn.com/abstract=1908473 · source PDF

Wulf A. Kaal, Christoph Henkel, Contingent Capital with Sequential Triggers (2011). SSRN: https://ssrn.com/abstract=1908473

• Assumes the conversion trigger operates as designed

mechanismsupport: arguedrisk-and-incentivessystemic-riskcontingent-capital

• restated_by kaal:claim:2957645-007 By internalizing the costs of bank failure, contingent capital may be able to minimize moral hazard, avoid fin...
• extended_by kaal:claim:2957645-021 Appropriate use of contingent capital triggers can further lower the default risk of the contingent capital se...
• restated_by kaal:claim:1998455-008 Contingent capital contributes to minimizing moral hazard by internalizing bank failure costs, that is, by pla...
• restated_by kaal:claim:2061166-021 Contingent capital supports general risk control and reduces moral hazard by holding shareholders responsible ...

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