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Contingent Convertibles: Can the Market Handle them?

Author

Listed:
  • Gera Kiewiet

    (DNB. The Netherlands)

  • Iman van Lelyveld

    (DNB, VU Amsterdam and Tinbergen Institute, The Netherlands)

  • Sweder van Wijnbergen

    (University of Amsterdam, CEPR, Tinbergen Institute, The Netherlands)

Abstract

The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.

Suggested Citation

  • Gera Kiewiet & Iman van Lelyveld & Sweder van Wijnbergen, 2017. "Contingent Convertibles: Can the Market Handle them?," Tinbergen Institute Discussion Papers 17-095/VI, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20170095
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    Citations

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    Cited by:

    1. Name 1 Dieter Wang Email 1 & Iman (I.P.P.) van Lelyveld & Julia (J.) Schaumburg, 2018. "Do information contagion and business model similarities explain bank credit risk commonalities?," Tinbergen Institute Discussion Papers 18-100/IV, Tinbergen Institute.
    2. Fiordelisi, Franco & Pennacchi, George & Ricci, Ornella, 2020. "Are contingent convertibles going-concern capital?," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    3. Mike Derksen & Peter Spreij & Sweder Van Wijnbergen, 2022. "ACCOUNTING NOISE AND THE PRICING OF CoCos," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 25(07n08), pages 1-60, November.
    4. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    5. Ioana Neamtu, 2020. "Multiple buffer CoCos and their impact on financial stability," Tinbergen Institute Discussion Papers 20-010/IV, Tinbergen Institute.
    6. Name 1 Dieter Wang Email 1 & Iman (I.P.P.) van Lelyveld & Julia (J.) Schaumburg, 2018. "Do information contagion and business model similarities explain bank credit risk commonalities?," Tinbergen Institute Discussion Papers 18-100/IV, Tinbergen Institute.

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    More about this item

    Keywords

    Contagion; Contingent Convertible Capital; Systemic Risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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