Equity Recourse Notes: Creating Counter‐cyclical Bank Capital

We propose a new form of hybrid capital for banks, Equity Recourse Notes ( ERN s), which ( i ) ameliorate booms and busts by creating counter‐cyclical incentives for banks to raise capital, and so encourage bank lending in bad times; ( ii ) help solve the too‐big‐to‐fail problem; and ( iii ) reduce the regulatory system's reliance on accounting measures of capital. ERN s avoid the flaws of existing contingent convertible bonds (cocos) – in particular, they convert more credibly. Future required increases in bank‐capital should be permitted to be in the form of either equity or ERN s.