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Fed's Dudley: Issuing 'Contingent Capital' More Efficient

New York Fed President William Dudley said, "the introduction of a contingent capital instrument seems likely to hold real promise" when speaking of the improvements in the regulatory capital framework in New York.

William C. Dudley, President and CEO of the Federal Reserve Bank of New York
Stan Honda | AFP | Getty Images
William C. Dudley, President and CEO of the Federal Reserve Bank of New York

This strategy is thought to be more efficient than the practice of raising capital requirements because contingent capital is issued as equity only when needed and has the benefit of improving incentives for bank managements and shareholders.

"If the bank encounters difficulties, triggering conversion, shareholders would be automatically and immediately diluted. This would create strong incentives for bank managements to manage not only for good outcomes on the upside of the boom, but also against bad outcomes on the downside," Dudley said.

Dudley thought that issuing contingent capital would be a more straightforward way to achieve a countercyclical regulatory capital regime.

Dudley also touched on other beneficial changes to regulatory reform such as; improving risk capture associated with capital requirements, introducing conservation of capital rules during times of financial distress, and imposing higher capital requirements for systematically important institutions.

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