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Who or what has been hobbling CoCos: three essentials for making CoCos a success

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Abstract

CoCos are contingently convertible debt securities. They are an infant reform instrument that grew out of the 2007-09 crisis. As hybrid capital, they convert to common equity tier 1 (CET1) outside bankruptcy when a built-in trigger level of the regulatory capital ratio with risk-weighted assets (RWA), CET1/RWA, has been breached. For the going-concern Co-Cos here considered, that trigger level now has to be at least 7%. CoCos offer stabilization benefits from improved crisis management through efficient capital insurance that helps recapitalize a financial firm when needed. Even without regulatory mandates to issue them, they will have a market to the extent they lower the cost of capital to the firm. Despite their promise, there have been few going-concern CoCos issues to date. The outlook will remain bleak as long as complying with the capital requirements proposed by the Basel Committee on Banking Supervision (BCBS) and considered by the European Banking Authority (EBA) in effect relegates CoCos to the category of high-yield (speculative-grade or “junk”) bonds.

Suggested Citation

  • von Furstenberg, George M, 2013. "Who or what has been hobbling CoCos: three essentials for making CoCos a success," Journal of Financial Transformation, Capco Institute, vol. 36, pages 93-104.
    • Handle: RePEc:ris:jofitr:1547
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    Keywords

    CoCos; contingently convertible debt securities; crisis management; capital insurance; high-yield bonds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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