Contingent Capital: The Case for COERCs

Christian Wolff and George G. Pennacch
Authors registered in the RePEc Author Service: George G. Pennacchi and Theo Vermaelen

No 8028, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we propose a new security, the Call Option Enhanced Reverse Convertible (COERC). The security is a form of contingent capital, i.e. a bond that converts into equity when the market value of equity relative to debt falls below a certain trigger. The conversion price is set significantly below the trigger price and, at the same time, equity holders have the option to buy back the shares from the bondholders at the conversion price. Compared to other forms of contingent capital proposed in the literature, the COERC is less risky in a world where bank assets can experience sudden jumps. Moreover, the structure eliminates concerns about putting the company in a ?death spiral? as a result of manipulation or panic. A bank that issues COERCs also has a smaller incentive to choose investments that are subject to large losses.

Keywords: Banks; Financial crisis; Financial stability; Security design (search for similar items in EconPapers)
JEL-codes: G01 G20 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Contingent Capital: The Case of COERCs (2014)
Working Paper: Contingent Capital: The Case for COERCs (2010)
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