Richmond Fed paper examines triggers for contingent capital conversion
Working paper sees link between desirability of different triggers and ‘conversion rule’
Whether a regulator or fixed-price mechanism is more suitable for triggering the conversion of debt into equity depends on the ‘conversion rule', new research published by the Federal Reserve Bank of Richmond finds.
In the working paper, Fixed Prices and Regulatory Discretion as Triggers for Contingent Capital Conversion: An Experimental Examination, Douglas Davis and Edward Prescott define the conversion rule as "the effect of the conversion on the value of equity to incumbent equity owners".
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