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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Bank Resolution Procedures, Contingent Capital (CoCos), and Bail-Ins

Bank Resolution Procedures, Contingent Capital (CoCos), and Bail-Ins

(p.189) 16 Bank Resolution Procedures, Contingent Capital (CoCos), and Bail-Ins
Connectedness and Contagion

Hal S. Scott

The MIT Press

If capital and liquidity are the wings to address contagion, better insolvency resolution procedures for banking organizations and other financial institutions are the prayer. Effective resolution procedures are primarily designed to address the “too big to fail” (TBTF) problem by allowing banking organizations or other covered financial institutions to be resolved without public support. This chapter discusses the principal components of the new resolution system, contingent convertible capital instruments (CoCos) and bail-ins. The term “contingent capital” refers to a group of long-term hybrid debt instruments. The distinguishing characteristic of all contingent capital instruments is an embedded equity mandatory conversion provision, triggered automatically after the issuer's financial profile deteriorates below a defined threshold. These instruments are thus designed to provide more capital when needed so as to avoid formal resolution. Creditor bail-in transforms the basic loss absorbing functionality of contingent capital instruments into a more general and noncontractual method for restructuring a financial institution's liabilities without going through an extended resolution process.

Keywords:   insolvency resolution, financial regulation, contingent convertible capital instruments, creditor bail-ins, contingent capital

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