Contingent Convertible Obligations and Financial Stability

Zachary Feinstein and T. R. Hurd

Papers from arXiv.org

Abstract: This paper investigates whether a financial system can be made more stable if financial institutions share risk by exchanging contingent convertible (CoCo) debt obligations. The question is framed in a financial network model of debt and equity interlinkages with the addition of a variant of the CoCo that converts continuously when a bank's equity-debt ratio drops to a trigger level. The main theoretical result is a complete characterization of the clearing problem for the interbank debt and equity at the maturity of the obligations. We then introduce stylized networks to study when introducing contingent convertible bonds improves financial stability, as well as specific networks for which contingent convertible bonds do not provide uniformly improved system performance. To return to the main question, we examine the EU financial network at the time of the 2011 EBA stress test to do comparative statics to study the implications of CoCo debt on financial stability. It is found that by replacing all unsecured interbank debt by standardized CoCo interbank debt securities, systemic risk in the EU will decrease and bank shareholder value will increase.

Date: 2020-06, Revised 2022-10
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 (1)

Downloads: (external link)
http://arxiv.org/pdf/2006.01037 Latest version (application/pdf)

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:arx:papers:2006.01037

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().