Contingent Capital as an Asset Class

Abstract

Contingent capital has been embraced recently by regulators with the purpose to increase loss-absorption capacity of a “too important to fail” bank. However, investors have not understood well enough how the risk of contingent capital is analyzed. The author illustrates how the risk is examined and how contingent claims are priced in a uniform asset pricing framework. He demonstrates that contingent capital is not only an important component in regulatory capital but also has rich features as an asset class for investors, particularly in times of stress.

TOPICS: Risk management, financial crises and financial market history