We thank our discussant Wolf Wagner, and three referees for their helpful comments. We are grateful to Pierre Lepicard, Philippe Henrotte, Pedro Ferreira, Paul Pfleiderer, Tano Santos, Suresh Sundaresan and Zhenyu Wang for many helpful comments. We especially thank Elina Berrebi, Kambiz Mohkam and Louis van Roosendaal for excellent research assistance and also Clement Boisson. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Crédit Agricole Group. Previous drafts of this paper have been circulated under the titles ‘Contingent Capital and Long-Term Investors: A Natural Match?’ (2010) and ‘Capital Access Bonds: Securities Implementing Counter-Cyclical Investment Strategies’ (2011).
Capital access bonds: contingent capital with an option to convert
Article first published online: 4 APR 2012
© CEPR, CES, MSH, 2012
Volume 27, Issue 70, pages 275–317, April 2012
How to Cite
Bolton, P. and Samama, F. (2012), Capital access bonds: contingent capital with an option to convert. Economic Policy, 27: 275–317. doi: 10.1111/j.1468-0327.2012.00284.x
The Managing Editor in charge of this paper was Philip Lane.
- Issue published online: 4 APR 2012
- Article first published online: 4 APR 2012
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 (transparent and flexible) form of equity-capital regulation. The form of contingent capital we propose (capital access bond) reflects a balance between investors’ preferences, issuers’ constraints, and regulators’ objectives.
— Patrick Bolton and Frédéric Samama