Kaal claims by topic: contingent-capital

126 atomic, individually citable claims from the published work of Wulf A. Kaal tagged contingent-capital.

Contingent capital is defined as the predefined conversion of a financial institution's debt securities into equity securities upon a triggering event, and this stipulated definition governs the whole analysis. 2011
Contrary to proposals that would replace Chapter 11 with contingent capital, the authors argue Chapter 11 needs no replacement; contingent capital should instead stabilize large financial firms for which Chapter 11 reorganization is not ideal or not legally available. 2011
If conversion of contingent capital securities is triggered too early, before a real financial need for an equity injection exists, the expected financial impact of that injection may dissipate. 2011
If conversion from debt to equity is triggered too late, the institution may already be in the resolution stage, and conversion at that point may not supply enough equity to produce the intended financial improvement. 2011
Because policymakers may adopt a suboptimal single trigger design, and because contingent capital has uses at several points in a firm's life cycle, contingent capital securities should be built with sequential triggers rather than one. 2011
The second trigger, which increases voting rights before resolution, should fire on evidence that conversion into equity was unsuccessful, that conversion came too early or too late, or that the firm's financial performance keeps trending downward. 2011
Beyond super-voting rights and dilution, the second trigger functions as a reorganization tool that operates independently of management decisions and of corrective action by regulators. 2011
The first trigger should be based on a threshold in market value rather than accounting measures, because a market value trigger avoids total reliance on accounting methods that are open to manipulation. 2011
The volume of contingent capital issuance should be large enough that conversion produces sufficient dilution, and the trigger timeframe should be roughly ninety days. 2011
Contingent capital offers only limited protection against information asymmetries, principal and agent conflicts, and collective action problems, so it cannot by itself prevent economic failure. 2011
Existing proposals for implementing contingent capital do not explain how they would address the information asymmetries and principal and agent problems that may lie at the core of the credit crisis. 2011
Switching to contingent capital financing may reinforce rather than reduce risk incentives, and whether the risk incentives generated by contingent capital outweigh its risk reduction potential remains unresolved. 2011
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. 2011
Contingent capital securities are likely to be more efficient than raising capital requirements, because the capital arrives only when it is needed. 2011
The threat of loss on conversion and the implicit dilution of existing stock holdings reduce shareholders' incentive to press management for higher risk in pursuit of higher returns. 2011
Without a degree of international convergence in contingent capital rules, regulatory arbitrage could undermine the establishment of contingent capital as an integral part of financial markets. 2011
Although the EU debt write-down proposal gives regulators certainty and discretion, it could produce greater market uncertainty, raise costs, and have the unintended effect of increasing the size of financial institutions. 2011
A dual trigger that relies on a financial institution index gains from its use of market prices but is vulnerable to index manipulation and to bondholders attempting to force the institution into bankruptcy. 2011
Departing from Coffee's design, super-voting rights should be allocated to contingent capital holders only if the first trigger failed to improve the institution's financial health; at the first trigger the new shareholder gets one vote per share. 2011
Conversion at the first trigger under this proposal lacks the finality of Coffee's design, because it does not necessarily hand the institution to creditors unless the firm deteriorates further. 2011
The second trigger should be an objective, automatic, institution specific trigger, with improvement measured through a combination of debt to equity ratio improvement and credit default swap spread narrowing after conversion. 2011
The second trigger voting rights increase should never actually be triggered; its function is to level the playing field between constituents, incentivize negotiation, and provide an alternative to reorganization. 2011
Strategic maneuvering by creditors before a bankruptcy filing or during plan negotiations could distort the incentive structure the sequential trigger proposal depends on. 2011
The authors contend that the European Commission's goal of maximum harmonization through a global single rule book may not be achievable, and that a legal framework for private ordering of contingent capital is the more realistic route to an adequate level of convergence. 2012
Contingent capital is stipulated as the predefined conversion of a financial institution's debt securities into equity securities, and on that definition it supplies an option for the efficient restructuring and resolution of failing financial institutions. 2012
The authors identify a drafting defect in the proposed CRD IV Regulation: the distinction drawn by financial institution in Article 51(a) is ambiguous and the cross reference to the institution referred to in point (a) of Article 87 is unclear and indeterminate, so the provision requires clarification or amendment. 2012
Contingent capital supports general risk control and reduces moral hazard by holding shareholders responsible and internalizing the costs of bank failure rather than externalizing them onto taxpayers. 2012
Because conversion carries a threat of loss and implicit dilution of stock holdings, contingent capital reduces shareholders' incentive to push management toward higher risk in pursuit of higher returns. 2012
The authors contend that the European Commission's suggested floor of 4 to 19 percent of risk-weighted assets in pre-qualified bail-inable debt under the targeted approach is unrealistically high. 2012
Implementing the European Commission's debt write-down proposal has the potential to increase funding costs for financial institutions and to make their funding more volatile. 2012
Article 13 of the Swiss Banking Act, which authorizes boards of systemically important banks to issue mandatory convertible bonds subject to disclosure of the conversion triggering event and permits tranches with multiple triggers, could serve as a model for other European legislators and for the United States legislator. 2012
Enacting the proposed German Corporation Act amendments that would give contingent capital securities a statutory basis would require substantial changes across other areas of German law, and is unlikely to be achieved unless European Union law requires it and the standards are internationally recognized. 2012
Efficient calibration of the triggering event is the central design problem for contingent capital, and the optimal design of a trigger that converts debt into equity remains unclear. 2012
Mandating the issuance of contingent capital does not guarantee that a viable market in contingent capital securities will develop. 2012
Building critical mass in the contingent capital securities market could require banks and other financial institutions to buy their competitors' contingent capital securities, which would raise ethical, antitrust and incentive concerns. 2012
The authors posit an inverse relationship between trigger uncertainty and market development: as the uncertainty generated by trigger designs increases, issuance volume of contingent capital securities falls, while the risk and the pre-conversion interest rate on those securities rises. 2012
A trigger that fires too early wastes the equity injection: conversion occurs without a real need for capital or additional voting shareholders, and the effect of the injection may have dissipated by the time it is actually needed. 2012
A trigger that fires too late is equally useless: by then the financial institution may already be in the resolution stage, and conversion at that point will not supply enough equity to turn the company around. 2012
Dual trigger proposals draw their central strength from reliance on market prices, but the index leg is a major disadvantage because it can create incentives to manipulate the index or to force an entity into bankruptcy before conversion occurs. 2012
A second, sequential trigger placed before reorganization or resolution cushions the risk that policy makers misstructure the first trigger, absorbing the negative effects of inadequate or untimely conversion at the moment the institution needs capital. 2012
Conversion of contingent capital securities from debt to equity should be timed to occur once problems are first detected but before the early intervention powers of regulatory authorities are triggered. 2012
Using contingent capital as a preventative tool does not foreclose the statutory core power or the debt write-down tool within resolution; if early contractual write-down and conversion fail, authorities remain free to intervene and impose a haircut on shareholders, debt investors and other private parties. 2012
Convergence of contingent capital standards is impeded by a first mover problem: single jurisdictions hesitate to impose contingent capital requirements before they know how competing jurisdictions and their financial institutions will structure their own rules. 2012
Without a degree of similarity and convergence in bank resolution and contingent capital rules, regulatory arbitrage will work against establishing contingent capital as an integral part of financial markets. 2012
Given the European initiatives on contingent capital and the nascent European market in contingent capital securities, the Board of Governors of the United States Federal Reserve would be well advised to consider implementing contingent capital standards. 2012
The Basel Committee rejected European Union Member State requests to allow contingent capital to satisfy the new capital buffer requirements under Basel III, deciding instead that systemically important institutions must meet heightened capital requirements with retained earnings and ordinary shares. 2012
Early European initiatives to put contingent convertible bonds into executive pay lack governance-improving designs; contingent convertible bonds with an early conversion trigger should be used in executive compensation instead. 2012
Contingent convertible bonds placed in executive compensation serve a different purpose than those sold to investors: the point is not capital infusion during a crisis but governance-improving design that optimizes management incentives. 2012
The conversion feature of contingent convertible bonds affects corporate governance in a SIFI only if issuance volumes are sufficient and design features are adequate, because the governance effect runs through the threat of dilution of existing equity positions. 2012
Market solutions and private ordering alone are unlikely to produce contingent capital designs that improve corporate governance in SIFIs, because privately negotiated sales so far have not produced governance-sensitive designs. 2012
Adding contingent convertible bonds with an early trigger to executive compensation packages creates a corporate governance mechanism that addresses the inability of contractual control rights to constrain executive opportunism. 2012
Barclays's Contingent Capital Plan uses synthetic CoCos that simply lapse when the Group Core Tier 1 capital ratio falls below seven percent, rather than converting into equity. 2012
A contingent capital award to executives without a conversion feature yields only limited governance improvement and only limited incentive to lower risk-taking; in its current form it operates as a mere compensation supplement. 2012
Contingent convertible bonds issued to executives are typically too small in volume to dilute investors' equity holdings or to supply a meaningful equity infusion during a crisis, so copying investor CoCo designs for executive pay produces suboptimal outcomes. 2012
The early trigger converts only the executives' portion of debt into equity, ahead of investors' contingent convertible bonds and while the entity is still sound on a micro-prudential basis, which is what makes it an early warning system rather than a recapitalization device. 2012
Regulatory triggers generate the highest level of uncertainty and can produce ad hoc regulatory decisions and adverse market responses, so they are not the best option for contingent convertible bonds in executive compensation. 2012
Regulatory triggers insufficiently incentivize executives to lower risk, because executives would not have to self-monitor and adjust their own risk-taking preferences in order to avoid the trigger. 2012
Market-based trigger measures are vulnerable to market manipulation and bank runs, while accounting-based measures are updated too infrequently to respond adequately in a financial crisis. 2012
Institution-specific automatic triggers are the preferred basis for early trigger designs because they are flexible and independent of regulatory discretion. 2012
To be effective, early triggers must be set well above the Basel III capital requirement threshold, and capital-ratio early triggers should be independent of regulatory demands about capitalization levels. 2012
Because conversion damages both the debt portion and the surviving equity portion of an executive's package at the moment equity matters most for total pay, the combined effect is a strong incentive for executives to lower risk in order to avoid the triggering event. 2012
The impending threat of dilution from a possible conversion of investor-held contingent convertible bonds can motivate existing shareholders to become actively involved in the governance of the entity. 2012
Early triggers in executive compensation improve the signaling of default risk by producing the signal while default risk is present but still somewhat remote. 2012
Executives paid in contingent convertible bonds have an opportunistic reason to manipulate the triggering event, because conversion at a depressed price before or during a crisis hands them cheap stock. 2012
If executives influence the drafting of their own trigger, opportunism within the bounds of fiduciary duty will produce suboptimal early triggers and increase the potential for abuse, because executives can use the trigger to obtain cheap stock during a crisis. 2012
Regulatory guidance on contingent capital design and issuance may be needed to curtail executive involvement in designing these instruments and to produce socially optimal designs. 2012
Contingent convertible bonds with a conversion feature add what plain inside debt lacks: an early warning system and a buffer before insolvency that can help the entity avoid default. 2012
Unlike the liquidation value backing traditional inside debt, equity received by executives on early conversion can still appreciate, because the early trigger creates a substantial buffer before insolvency. 2012
Against the critique that long-term debt in pay does not deter short-run risky bets because expected short-term gains exceed the discounted value of the debt, adding early-trigger contingent convertible bonds changes managers' incentives by forcing them to weigh the effects of triggering events rather than only the debt to equity mix of their portfolio. 2012
Trigger designs that work well in institutions with the traditional mix of debt-holders and shareholders may be suboptimal once executives themselves hold contingent convertible bonds. 2012
Who owns the contingent convertible bonds affects the efficiency, effectiveness, and corporate governance results of a trigger design, so ownership characteristics belong in the design analysis. 2012
An early trigger design for contingent convertible bonds in executive compensation enables earlier signaling of default risk, increases incentives for creditors and shareholders to monitor, and increases executives' incentives to lower risk-taking. 2012
Because both European regulatory initiatives and the United States academic debate concentrate on the technical design features of contingent capital securities, the possible corporate governance applications of those securities are mostly ignored. 2012
Combined with other corporate governance mechanisms, contingent capital securities function as an internal, institution specific mechanism that could fill the void left by regulators' apparent inability to supervise financial institutions effectively. 2012
For purposes of this Article contingent capital is stipulated to be the predefined conversion of a certain percentage of a financial institution's debt securities into equity securities. 2012
Contingent capital contributes to minimizing moral hazard by internalizing bank failure costs, that is, by placing those costs on the institution's own security holders rather than on the public. 2012
Installing contingent capital can be more efficient than raising capital requirements, because the capital injection becomes available only when it is needed and only enough securities convert to recapitalize the firm. 2012
The threat of dilution of stock holdings, combined with the threat of loss on conversion, reduces the pressure shareholders place on the management of systemically important financial institutions to take higher risks. 2012
Trigger designs can be ranked by the certainty they give market participants: institution specific triggers presumably grant the most certainty, while regulatory trigger designs provide lower levels of certainty. 2012
Converting contingent capital securities prematurely, while the institution can still operate without an equity injection, dissipates the benefit: the injection is no longer available at the later moment when the institution cannot obtain other funding. 2012
Converting contingent capital securities too late makes the capital injection superfluous, because by that stage the institution may face unresolvable difficulties that a capital injection can only marginally soften, and conversion may not suffice once the institution has entered resolution. 2012
Contingent capital by itself, without additional measures and supplemental corporate governance improvements, may not prevent firm failure; its real potential unfolds only when it supplements other corporate governance improvements. 2012
Divergent national definitions of Tier 1 capital produce a distortion: financial institutions in countries with stricter definitions that exclude contingent capital appear to hold less capital and thinner capital cushions than institutions in countries with broader definitions, and investors may read that appearance as a negative attribute. 2012
If a market evolves in which contingent capital designs appear to provide sufficient protection against systemic risk and contagion, decision makers may come to rely on the design of those securities and neglect their own role as monitors. 2012
Contingent capital rules could contribute to overriding the moral reasoning of decision makers, in which case contingent capital would actually increase, not reduce, risk incentives for institutions that are too big to fail. 2012
Switching to contingent capital financing could reinforce rather than dampen risk incentives, and these distorted risk incentives are a drawback of contingent capital issuances. 2012
Absent cross holdings, the opposite conflict arises: institutions holding a competitor's converted contingent capital could be tempted to exercise their voting rights against the interests of that competitor. 2012
The combination of demonstrated investor interest and an underdeveloped regulatory structure in the United States presents a unique opportunity to experiment with contingent capital designs and with their application to the corporate governance of systemically important financial institutions. 2012
Contingent capital securities approximate the characteristics of a quasi-public good: just as ships cannot readily be excluded from a lighthouse, systemically important institutions benefit from the issuance of contingent capital by other such institutions whenever the design minimizes systemic risk and contagion. 2012
The social welfare maximization potential of contingent capital securities is lower if their design features are left entirely to private ordering, because private parties do not necessarily structure those features with a view toward the common good, the avoidance of future bailouts, or the limitation of systemic risk and contagion. 2012
Issuing contingent capital securities with a conversion feature is a way for a banking entity to signal to its market that it will adhere to stricter standards, ethical or otherwise. 2012
A contingent capital design that increases voting rights on conversion allows systemically important institutions to lower risk taking implicitly and to achieve an indirect, institution specific form of corporate governance reform through increased checks and balances. 2012
Management incentives for risk control are heightened upon conversion, especially where management knows that holders of converted contingent capital would command a majority vote, with or without institutional shareholders. 2012
If central banks were to purchase contingent capital securities issued by systemically important institutions in the primary or secondary market as part of monetary policy, the prospect of internalizing bank failure costs would be undermined, and primary market purchases could also undermine market participants' confidence in these instruments. 2012
Contingent capital can facilitate an incentive structure that lets regulators rely partially on private party contracting for the design of these securities while still accounting for systemic risk. 2012
Although implementing dynamic elements in regulatory structures remains uncertain, promising regulatory tools with dynamic elements already exist, including contingent capital securities, corporate integrity agreements, and deferred prosecution agreements. 2013
Depending on their design, contingent capital securities can function as an early warning system that helps preempt financial crises. 2013
Institution specific automatic triggers in contingent capital securities are flexible and can be tailored to the parties' needs precisely because they operate independently of regulatory discretion. 2013
Managers are incentivized to manage their institutions so as to avoid contingent capital triggers, and that incentive itself can optimize the governance of financial institutions. 2013
A contingent capital triggering event signals that management was unable to manage the entity so as to avoid the trigger, and therefore signals to rulemakers that regulatory action may be needed, information regulators cannot obtain by monitoring debt to equity and capital adequacy ratios alone. 2013
Contingent capital triggers have significant design limitations: accounting based triggers may not respond adequately in financial crises because they are updated too infrequently, while market based triggers are susceptible to market manipulation and bank runs. 2013
Regulation of innovation in a dynamic framework is triggered only as a supplement to the existing rulemaking framework, and only if and when feedback effects anticipate otherwise unforeseen contingencies and regulatory needs associated with innovation. 2016
Contingent capital securities are a largely overlooked dynamic regulatory mechanism, and their regulatory value lies in their capacity to generate feedback effects, optimized timing, and improved information for regulation. 2017
The issuance of contingent capital securities is a promising dynamic regulatory mechanism that can help address the suboptimal regulatory outcomes associated with disruptive innovation. 2017
By internalizing the costs of bank failure, contingent capital may be able to minimize moral hazard, avoid financial contagion, and limit systemic risk. 2017
Section 165(b) of the Dodd-Frank Act already authorizes the Board of Governors of the Federal Reserve to utilize contingent capital, so the mechanism has a statutory foundation in United States law. 2017
Contingent capital is an automatic mechanism for increasing capital while reducing debt, and its long term benefit is lowering leverage. 2017
For purposes of this article, contingent capital is stipulated to mean the predefined conversion of a certain percentage of a financial institution's debt securities into equity securities. 2017
Strained financial institutions may find the automatic conversion of debt into equity through contingent capital securities an attractive alternative to being forced into restructuring or liquidation. 2017
The conversion feature of contingent capital securities has the potential to change the control dynamic, the distribution of power, and the dependencies within systemically important financial institutions. 2017
Regulators are often unable to supervise financial institutions effectively because of insufficient public funding, and contingent capital securities could help fill the void that this supervisory incapacity leaves. 2017
Contingent capital may be more efficient than simply raising capital requirements, because the capital injection is available only when it is needed and, when triggered, only as much of the contingent capital converts as is necessary to recapitalize the firm. 2017
Appropriate use of contingent capital triggers can further lower the default risk of the contingent capital securities themselves, on top of the moral hazard reduction that comes from internalizing bank failure costs. 2017
The threat of dilution of stock holdings, combined with the threat of loss upon conversion, could help reduce the pressure shareholders place on management of systemically important financial institutions to take increasing risks. 2017
Where conversion has a negative effect on stock price, management is further incentivized to maintain and manage risk in order to avoid reputational loss and the income reduction caused by losses in stock options. 2017
Contingent capital could create a regime for providing countercyclical regulatory capital that further enhances the regulatory capital requirements of the Federal Reserve and those under Basel III. 2017
Contingent capital qualifies as a dynamic regulatory mechanism because capital injection is available only if and when needed and because the conversion of contingent capital securities into near worthless equity signals impending regulatory issues to regulators, which creates feedback effects. 2017
Contingent capital securities optimize information for rulemaking because, when issued and triggered, they produce highly valuable, real time, decentralized information on the financial wellbeing of a given regulated entity. 2017
Contingent capital creates feedback effects because the conversion of debt to equity signals to regulators that the entity's management was unable to avoid the trigger, which is itself a call for increased regulatory scrutiny. 2017
The occurrence of the debt to equity trigger creates real time regulatory information that a centralized system would require months or years to generate, and it enables regulators to open a regulatory investigation if and when one is needed. 2017
Contingent capital enables anticipatory regulation because regulators may observe and react in real time to triggering events, before the regulated entities encounter financial calamity. 2017
Information generated by contingent capital securities may allow regulators to adjust their regulatory requirements and the intensity of regulatory investigations anticipatorily rather than after the fact. 2017
Most of the design features of contingent capital securities and their triggering events remain underdeveloped, yet despite these shortcomings such securities could still help regulators anticipate regulatory needs in real time through feedback effects and improved information. 2017
Data on investment in new technology can be used as an index or proxy for the necessity of regulation, supplying the signal that fact based regulation cannot generate in time. 2017
Trading a token directly against a well established stable cryptocurrency removes several layers of conversion fees and eliminates the risk that the bridge currency depreciates during the sequence of trades. 2019
Allowing periodic opportunities for renegotiation lets players escape the grim trigger trap, but it does not improve outcomes overall because it creates new incentives to defect and then gamble on talking one's way out of the punishment. 2021