The Federal Reserve is in discussions with U.S. banks regarding the use of a hybrid security, known as a contingent convertible. The security acts as a bond when a bank is profitable and pays coupon interest to investors. But when a bank is in trouble, the security converts into equity, allowing the bank more leeway on its balance sheet. William Dudley, president of the Federal Reserve Bank of New York, said such instruments are promising. "If these contingent capital buffers were large ... then the worst aspects of the banking crisis might have been averted," Dudley said.
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