Contingent Capital

Contingent capital refers to financial instruments that convert into equity or are repaid under specific conditions, primarily used by banks and financial institutions to strengthen their capital base during tough times. Essentially, these instruments act as safety nets; if a bank’s financial health declines—such as falling below a certain capital threshold—these securities automatically turn into shares or debt to help stabilize the institution. This mechanism provides a layer of protection for investors and aims to prevent bank failures, ensuring the financial system remains resilient during economic downturns.