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The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone

Author

Listed:
  • Roman Goncharenko

    (KU Leuven - Department of Accountancy, Finance and Insurance (AFI))

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

  • Asad Rauf

    (KUniversity of Groningen)

Abstract

Most regulators grant contingent convertible bonds (CoCos) the status of equity. Theory, however, suggests that CoCos can induce debt overhang, thereby, increasing the cost of issuing equity. First, we theoretically investigate how the extent of this debt overhang varies with bank characteristics. Our model predicts that riskier banks face higher debt overhang from CoCos. Our empirical analysis confirms that riskier banks are less likely to issue CoCos than their safer counterparts. Since under Basel III banks are expected to raise equity prior to CoCo conversion, riskier banks that anticipate future equity issuance are less likely to issue CoCos before.

Suggested Citation

  • Roman Goncharenko & Steven Ongena & Asad Rauf, 2019. "The Agency of CoCos: Why Contingent Convertible Bonds Aren't for Everyone," Swiss Finance Institute Research Paper Series 19-43, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1943
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    Cited by:

    1. Michael Sigmund & Kevin Zimmermann, 2021. "Determinants of Contingent Convertible Bond Coupon Rates of Banks: An Empirical Analysis (Michael Sigmund, Kevin Zimmermann)," Working Papers 236, Oesterreichische Nationalbank (Austrian Central Bank).
    2. Castrén, Olli & Kavonius, Ilja Kristian & Rancan, Michela, 2022. "Digital currencies in financial networks," Journal of Financial Stability, Elsevier, vol. 60(C).
    3. Allen, Franklin & Barbalau, Adelina, 2024. "Security design: A review," Journal of Financial Intermediation, Elsevier, vol. 60(C).
    4. Kund, Arndt-Gerrit & Hertrampf, Patrick & Neitzert, Florian, 2023. "Bail-in requirements and CoCo bond issuance," Finance Research Letters, Elsevier, vol. 53(C).
    5. Jozef N. Coppelmans & Fieke M. A. Wagemans & Lotte F. Dillen, 2024. "An empirical investigation of emotion and the criminal law: towards a “criminalization bias”?," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 11(1), pages 1-17, December.
    6. Ambrocio, Gene & Hasan, Iftekhar & Jokivuolle, Esa & Ristolainen, Kim, 2020. "Are bank capital requirements optimally set? Evidence from researchers’ views," Journal of Financial Stability, Elsevier, vol. 50(C).
    7. Fatouh, Mahmoud & Neamtu, Ioana & van Wijnbergen, Sweder, 2022. "Risk-Taking, Competition and Uncertainty: Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks?," CEPR Discussion Papers 17062, C.E.P.R. Discussion Papers.
    8. Javadi, Siamak & Li, Weiping & Nejadmalayeri, Ali, 2023. "Contingent capital conversion under dual asset and equity jump–diffusions," International Review of Financial Analysis, Elsevier, vol. 89(C).
    9. Pierluigi Bologna & Arianna Miglietta & Anatoli Segura, 2020. "Contagion in the CoCos Market? A Case Study of Two Stress Events," International Journal of Central Banking, International Journal of Central Banking, vol. 16(6), pages 137-184, December.
    10. Raviv, Alon & Hilscher, Jens & Peleg Lazar, Sharon, 2021. "Designing bankers' pay: Using contingent capital to reduce risk-shifting," MPRA Paper 106596, University Library of Munich, Germany.
    11. Allen, Linda & Golfari, Andrea, 2023. "Do CoCos serve the goals of macroprudential supervisors or bank managers?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    12. Zhang, Sijia & Xia, Xin & Gan, Liu, 2025. "Optimal conversion ratio of contingent capital under issuance constraints," International Review of Financial Analysis, Elsevier, vol. 100(C).
    13. Mahmoud Fatouh & Ioana Neamțu & Sweder van Wijnbergen, 2021. "Risk-taking and uncertainty: do contingent convertible (CoCo) bonds increase the risk appetite of banks?," Bank of England working papers 938, Bank of England.

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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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