CoCo Issuance and Bank Fragility

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

No 12418, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 a statistically significant decline in issuers’ CDS spread, 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: Contingent convertible capital securities; Bail-in (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (17)

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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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