Mind the conversion risk: contingent convertible bonds as a transmission channel of systemic risk

Gaëtan Le Quang

Finance, 2023, vol. 44, issue 4, 114-145

Abstract: We develop a model to assess the systemic risk associated with contingent convertible (coco) bonds. When their conversion is related to changes in their market price ? in the perspective of what the literature has coined as indirect market discipline ?, coco bonds can act as a transmission channel of systemic risk. In this case, a self-fulfilling crisis can indeed occur because of panic sales of coco bonds motivated by the expectation of conversion by coco bonds? holders. In addition, we show that increasing the precision of the information disclosed by the bank through its financial statements most of the times decreases the probability that such a crisis happens. On the contrary, increasing the precision of the information privately held by coco bonds? holders has most of the times the opposite effect. This paper therefore calls for cautiousness when it comes to considering market-triggered coco bonds as a complement to equity. JEL codes: G21, G28, G33, K23

Keywords: banking regulation; capital requirements; bail-in; contingent convertible bonds; market discipline (search for similar items in EconPapers)
JEL-codes: G21 G28 G33 K23 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cairn.info/load_pdf.php?ID_ARTICLE=FINA_PR_019 (application/pdf)
http://www.cairn.info/revue-finance-2023-4-page-114.htm (text/html)
restricted

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cai:finpug:fina_pr_019

Access Statistics for this article

More articles in Finance from Presses universitaires de Grenoble
Bibliographic data for series maintained by Jean-Baptiste de Vathaire ().