Is Single Trigger Contingent Capital Certificates an Effective Tool to Manage Risk?
The purpose of this paper is to highlight that contingent capital certificates (CC certificates) provide financial institutions with the cushion to resist financial crises, but if the structure of these CC certificates is based on the singular trigger, it can cause a transfer of wealth between investors, i.e., existing shareholders and the CC certificate holders. Many financial institutions, to date, have issued CC certificates based on a singular trigger (i.e., capital ratio/ Accounting triggers or market-based triggers), which are not as effective and reliable as multiple triggers. The paper includes a hypothetical base case to understand the triggers and case of Lehman Brothers Inc. (which filed chapter 11 bankruptcy protection on September 11th, 2008) to examine how the single trigger approach of the issuing financial institution can cause a transfer of wealth between the existing shareholders and the CC certificate holders. Book values of CC certificates are used to measure the transfer of wealth.