Account for This!
A policy proposal floating around these days is to require banks to issue contingent convertible debt:
MY [Mankiw's] favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance.
A lawyer asks how these might be structured. This accountant asks: how would you account for them? Note that unlike many contingent convertible securities, the event on which conversion is contingent is a regulatory action.
Tom Selling
May 4th, 2010