Publication

This short document develops a proposal aimed at sounder restructuring of distressed financial companies. We recommend support for a new regulatory hybrid security that will expedite the recapitalization of banks. This instrument resembles long-term debt in normal times, but converts to equity when the financial system and the issuing bank are both under financial stress. The goal is to avoid ad hoc measures such as those taken in the current crisis, which are costly to taxpayers and may turn out to be limited in effectiveness. The regulatory hybrid security we envision would be transparent, less costly to taxpayers, and more effective.