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Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue?

George von Furstenberg ()

No 2011,01, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank

Abstract: This study examines the promise of reducing expected resolution costs of financial institutions through either voluntary or mandated addition of contingently convertible debt securities to their long-term financing mix. I model the stochastic process by which an initially very well capitalized banking firm may come to violate its minimum capital maintenance requirement. Conversion of cocos then provides a second chance because the firm's initial capitalization is restored. Although regulatory insolvency remains a distant threat, the expected reductions in the cost of bankruptcy and hence the cost of capital are such that cocos may win a place in the liability structure of financial institutions without the need for mandates.

Keywords: financial reforms; regulatory insolvency; contingent capital; bank regulations; cocos (search for similar items in EconPapers)
JEL-codes: E44 G33 G38 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-mac and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp2:201101

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