One of the big things to come out of the recent financial market turmoil is a desire to have better back stops for the banking system and to find a way to prevent the need for breaking up banks that fail. Many ideas have been mooted, including catastrophe bonds (as we’ve written about previously), with the latest being contingent capital.
This article in the British newspaper The Independent quotes the Bank of Englands deputy governor for financial stability, Paul Tucker, as saying that creation of a market in contingent capital could provide a form of catastrophe insurance for banks. Contingent capital get’s converted to equity and as such could provide the kind of cushion a bank in trouble may need.
Regulators are discussing the possibility of contingent capital becoming a requirement that banks would have to have in their recovery plans.
It’s interesting to see the financial markets go full circle and begin to come up with ways to protect themselves (and in return the rest of the markets), sadly it takes a near failure of the market for them to get to this point.