Capital Access Bonds: Contingent Capital with an Option to Convert

46 Pages Posted: 17 Nov 2011

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Frédéric Samama

Sciences Po, S&P

Date Written: September 1, 2011

Abstract

This paper argues that there is a Coasean Bargain available to banks, Long-term Investors, and Bank Regulators around a particular form of 'Contingent Capital'. By purchasing rights to issue equity in crisis events at a pre-specified price from Long-term Investors, banks can ensure that they will have sufficient regulatory capital available when they need it most: in a crisis. By selling these rights (effectively, a form of crisis insurance) long-term investors can monetize their counter-cyclical investments strategies in banks and, thus, obtain an adequate return as long-term investors. Bank Regulators, in turn, gain as they can thereby implement a more efficient form of equity-capital regulation. Banks have a special need to maintain their equity-capital base in the event of a crisis. Sovereign Wealth Funds and other long-term investors have proved to be the only available counterparties for banks in crisis times. This is why we argue that these investors must be able to monetize the countercyclical asset-management strategies they are trying to implement by obtaining a higher return on their cash reserves. The form of contingent capital we propose (Capital Access Bond) reflects a balance between investors’ preferences, issuers’ constraints, and regulators' objectives.

Keywords: contingent capital, counter-cyclical investment, banking

JEL Classification: G21, G28, G32

Suggested Citation

Bolton, Patrick and Samama, Frederic, Capital Access Bonds: Contingent Capital with an Option to Convert (September 1, 2011). Available at SSRN: https://ssrn.com/abstract=1960505 or http://dx.doi.org/10.2139/ssrn.1960505

Patrick Bolton (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Frederic Samama

Sciences Po, S&P ( email )

40 Rue de Courcelles
Paris, 75017
France

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