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Concocting Marketable Cocos

Author

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  • 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.

Suggested Citation

  • George M. von Furstenberg, 2011. "Concocting Marketable Cocos," Working Papers 222011, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:222011
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    File URL: http://www.hkimr.org/uploads/publication/58/ub_full_0_2_288_wp-no-22_2011-final-.pdf
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    References listed on IDEAS

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    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    6. Occhino, Filippo, 2010. "Is debt overhang causing firms to underinvest?," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jul.
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    8. George Pennacchi, 2010. "A structural model of contingent bank capital," Working Paper 1004, Federal Reserve Bank of Cleveland.
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    Citations

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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.

    More about this item

    Keywords

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

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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