of debt that is convertible to equity if they experience significant losses. This additional capital would protect them from insolvency during busts while allowing them to benefit from debt finance in boom times. U.S. regulators have also been charged with developing heightened prudential standards for systemically important institutions to constrain risk-taking by those firms whose failures would pose the greatest systemic risk.
One approach could involve imposing penalties or restrictions on financial firms based on factors such as the correlation of their strategies with those of other firms or by limiting risk exposure to individual counterparties. Policies are on the drawing board to ensure that institutions avoid undue reliance on shortterm debt and have adequate liquidity in market downturns.