CoCo issuance and bank fragility

Stefan Avdjiev, Bilyana Bogdanova, Patrick Bolton, Wei Jiang and Anastasia Kartasheva

No 678, BIS Working Papers from Bank for International Settlements

Abstract: The promise of contingent convertible capital securities (CoCos) as a 'bail-in' solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. In this paper, we undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521 billion. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCo issues result in statistically significant declines in issuers' CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.

Keywords: CoCos; Contingent Convertible Capital; Bank Capital Regulation; Basel III (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G32 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2017-11
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: CoCo issuance and bank fragility (2020)
Working Paper: CoCo Issuance and Bank Fragility (2017)
Working Paper: CoCo Issuance and Bank Fragility (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:678

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