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Concocting Marketable Cocos

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Author Info

  • George M. von Furstenberg

    (Indiana University and Hong Kong Institute for Monetary Research)

Abstract

Adding contingently convertible debt securities, cocos, in an amount equal to about 3% of tangible assets to the financing mix of financial institutions is a promising reform idea. It would also be inexpensive for these institutions to issue cocos and thus to be prepared to recapitalize and to avert failure by rebuilding common equity and reducing leverage and debt overhang in a crisis. For cocos to become readily marketable, much work is needed on their standardization and optimal design. That basic design should include a trigger couched in a regulatory capital ratio referenced in Basel III. It should also include conversion terms setting the rate of increase in the number of shares equal to the rate of growth of the book value of common equity through conversion. This would prevent redistribution from existing to new shareholders, guarantee their equality of treatment, and protect the subordination hierarchy with non-cocos debt.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 222011.

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Length: 44 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:hkm:wpaper:222011

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Related research

Keywords: Contingent Convertibles; Cocos Design; Capital Ratios; Financial Reform; Basel III;

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References

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  1. Edward J. Kane & Rosalind Bennett & Robert Oshinsky, 2008. "Evidence of Improved Monitoring and Insolvency Resolution after FDICIA," NBER Working Papers 14576, National Bureau of Economic Research, Inc.
  2. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," CEP Discussion Papers dp0093, Centre for Economic Performance, LSE.
  3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  4. Fabio Panetta & Thomas Faeh & Giuseppe Grande & Corrinne Ho & Michael King & Aviram Levy & Federico M. Signoretti & Marco Taboga & Andrea Zaghini, 2009. "An assessment of financial sector rescue programmes," Questioni di Economia e Finanza (Occasional Papers) 47, Bank of Italy, Economic Research and International Relations Area.
  5. George Pennacchi, 2010. "A structural model of contingent bank capital," Working Paper 1004, Federal Reserve Bank of Cleveland.
  6. Filippo Occhino, 2010. "Is debt overhang causing firms to underinvest?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jul.
  7. repec:cep:stitep:250 is not listed on IDEAS
  8. Reinhart, Carmen & Rogoff, Kenneth, 2009. "This Time It’s Different: Eight Centuries of Financial Folly-Preface," MPRA Paper 17451, University Library of Munich, Germany.
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Cited by:
  1. Gregory Connor & Brian O’Kelly, 2012. "A Coasean Approach to Bank Resolution Policy in the Eurozone," FMG Special Papers sp214, Financial Markets Group.
  2. Fernando Díaz & Gabriel Ramírez & Kenneth Daniels, 2013. "Corporate Bond Clawbacks as Contingent Capital," Working Papers 44, Facultad de Economía y Empresa, Universidad Diego Portales.

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