For this reason, among others, it is important to ensure that other regulatory tools will help compensate for the uncertainties associated with an essentially untested mechanism. It also suggests the importance of exploring additional means to increase market discipline. A good resolution mechanism is an essential component of an effective regulatory system, but standing alone it is far from sufficient.
A second proposal that has received considerable attention is to require large financial institutions to hold so-called contingent capital, which is basically debt that converts to common equity as a result of some predefined triggering event. There are actually two distinct concepts that may be characterized as “contingent” capital.