Countercyclical contingent capital

Emilio Barucci, Luca Del Viva

Research output: Indexed journal article Articlepeer-review

13 Citations (Scopus)


We analyze the optimal capital structure of a bank issuing countercyclical contingent capital, i.e., notes to be converted into common shares in poor macroeconomic conditions. A comparison of the main effects produced by the countercyclical asset with the simple equity-debt capital structure, the non-countercyclical contingent capital and the countercyclical callable bond is conducted. We demonstrate that this type of asset reduces the spread of straight debt and is effective in reducing the asset substitution incentive. The reduction of bankruptcy costs is strong only when the countercyclicality feature is removed. Contingent capital is useful for macroprudential regulation and we show that the countercyclical feature is important depending on priorities (moderate the asset substitution incentive or reduce bankruptcy costs).

Original languageEnglish
Pages (from-to)1688-1709
Number of pages22
JournalJournal of Banking and Finance
Issue number6
Publication statusPublished - Jun 2012
Externally publishedYes


  • Capital structure
  • Convertible bonds
  • Countercyclical callable bonds
  • Leverage
  • Macroeconomic conditions


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