Roman Goncharenko, Steven Ongena, Asad Rauf, 03 March 2019

Most regulators grant contingent convertible bonds the status of equity. The theory, however, suggests that these securities can distort banks’ incentives to issue new equity. Using a model and European data, this column shows that banks with lower risk are more likely to issue CoCos compared to their riskier counterparts. In line with Basel III, banks are expected to raise equity prior to CoCo conversion, which makes the bonds an expensive source of capital. The design of CoCos should be revised if they are to enjoy equity-like treatment. 

Pierluigi Bologna, Arianna Miglietta, Anatoli Segura, 29 October 2018

Proponents of contingent convertible bonds, or CoCos, argue that they are effective instruments for bank recapitalisation. Sceptics argue that they introduce too much complexity, with potentially destabilising consequences. This column addresses this dispute empirically, using the dynamics of the CoCo market in 2016. The CoCo market at the time exhibited adverse dynamics that can’t be explained by banks’ fundamentals. Though some of this instability may have been transitory, the findings imply that the market should be monitored as it develops.

Stefan Avdjiev, Bilyana Bogdanova, Patrick Bolton, Wei Jiang, Anastasia Kartasheva, 22 December 2017

The promise of contingent convertible capital securities as a bail-in solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. This column reviews the results of the first comprehensive empirical analysis of bank CoCo issues. Among other things, it finds that the propensity to issue a CoCo is higher for larger and better-capitalised banks, and that their issue result in statistically significant declines in issuers' CDS spreads, indicating that they generate risk-reduction benefits and lower the costs of debt.

Martijn Boermans, Sinziana Petrescu, Razvan Vlahu, 17 November 2014

Contingent convertible capital instruments – also known as CoCos – have grown in popularity since the financial crisis. This column suggests that the search for yield and the tightening of capital requirements have resulted in a new wave of CoCo issuances. While many of their features and risks remain unclear, CoCos may act as a buffer that makes banks more resilient in times of crisis.  

Jeremy Bulow, Jacob Goldfield, Paul Klemperer, 29 August 2013

Today’s regulatory rules – especially the ineffective capital requirements – have led to costly bank failures. This column proposes a new, robust approach that uses market information but does not depend upon markets being ‘right’. Under the proposed regulatory system (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals. One key innovation is ‘Equity Recourse Notes’ that gradually ‘bail in’ equity as needed. These are superficially similar to, but fundamentally different from, 'CoCos'.

Charles Goodhart, 10 June 2010

As a consensus among academics begins to emerge over counter-cyclical financial regulation, former Bank of England Monetary Policy Committee member Charles A E Goodhart outlines why he is sceptical about “conditional convertibles” or CoCos – a form of debt that is “quasi-automatically” transformed into equity when banks get into trouble. Goodhart argues that CoCos would make the system more complex, potentially leading to problematic market dynamics.


CEPR Policy Research