Despite the skepticism, there is a high and increasing interest in contingent capital instruments.
Many designs of contingent capital have been proposed in trying to address the issues mentioned
above. The key differences between possible designs so far concern the trigger event and the
method of loss absorbency.
Scope of the trigger event. The trigger event can be based on the issuer's financial condition or on an
industry-wide indicator. Industry-wide indicators, such as an aggregated market loss index or
financial industry loss index, may be more suitable for mitigating systemic risk. However, it is hard
to implement in an objective way and may convey an adverse message to the market.
Type of the trigger event. The trigger event can be related to the stock price, regulatory capital
adequacy ratio such as core tier 1 ratio, credit condition such as credit default swap (CDS) spread, or
even at the regulator's discretion. Double trigger contingent capital has also been proposed.
Level of the trigger point. Going-concern contingent capital normally has a high threshold, while
gone-concern contingent capital has a low threshold, such as the point of non-viability. Besides the
conversion of contingent capital, regulator's intervention is normally expected at the point of nonviability.
The method of loss absorbency. After the trigger event happens, contingent capital instruments will be
converted to common equity, or have a write down of face amount and therefore liability. The
impact is considered to be different. Write-down liability is similar to a capital injection, while
conversion to equity is considered as capital restructure.
Details of those proposals and their different impacts will be explored in Section 3 and Section 4