Regulators could put less emphasis on additional permanent-equity capital and more on contingent capital, which is infused when the institution or the system is in trouble. In one version of contingent capital, systemically important banks could issue debt that would automatically convert to equity when the bank’s capital ratio falls below a certain value.14 In another, systemically important levered financial institutions would be required to buy fully collateralized insurance policies (from unlevered institutions, foreigners, or the government) that would infuse capital into these
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