Multiple buffer CoCos and their impact on financial stability

Arbeitspapier

In this paper we develop a theoretical model to investigate the effect on a bank's financial stability of having multiple contingent convertible bonds buffers (CoCos) on the same bank balance sheet, using cash-in-the-market pricing and global games methodologies. Contingent convertible bonds are meant to act as a bail-in mechanism for banks, where CoCo debt converts into equity when a bank needs it the most. We find that having CoCo buffers which trigger at different capitalisation levels can be detrimental for the CoCo bail-in capacity. Market-based triggers lead to premature conversion and fire-sales of equity. In contrast with existing literature, we show that book-based trigger CoCos yield an optimal outcome, as long as they incorporate expected credit losses.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2020-010/IV

Classification and Topics

• Classification: Wirtschaft ; Corporate Finance and Governance: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: contingent convertible bonds ; fire sales ; financial stability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Neamtu, Ioana
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/220047
• Last update: 10.03.2025, 11:44 AM CET