The predefined conversion of a specific percentage of a bank’s or an institution’s debt securities into equity securities. It is a long-term debt capital that is issued as convertible debt securities that would automatically convert into equity when triggered by a certain level of financial distress or weakening of the issuing institution. Conversion occurs when a certain stress-related trigger is breached, implying that private investors extend an automatic boost to loss-absorbing capital at the time of extreme need.

Contingent capital takes the form of a security (sometimes known as contingent convertibles, or CoCos) that is designed to recapitalize a troubled institution by converting a group of lenders (external investors) into equity holders, without a recourse to public funds (taxpayers funds through a government bail-out).