Are Banks Now Safer? What Can We Learn from the CoCo Markets?

6 Pages Posted: 21 Aug 2015

See all articles by Jan De Spiegeleer

Jan De Spiegeleer

RiskConcile

Stephan Höcht

Independent

Wim Schoutens

KU Leuven - Department of Mathematics

Date Written: August 20, 2015

Abstract

Contingent Convertible bonds or CoCos are loss absorbing hybrid instruments.CoCos can be seen as derivative instruments contingent on the CET1 level. Hence one can, using some standard models, infer from observed market prices of CoCos implied CET1 volatility levels. Recent regulatory reforms have urged banks to increase their CET1 levels and many banks have clearly done so. However, if one calculates the implied CET1 volatilities either on the basis of the contractual accounting CoCo trigger or even on an estimated PoNV trigger level, one sees also a significant increase in the CET1 volatility levels over the same period of time. The average level of the CET1 has been rising, but also the volatility or standard deviation of that level, indicating that a higher CET1 level not necessarily implies that banks have become safer. Bank’s capital levels are higher but have become also much more volatile.

Suggested Citation

De Spiegeleer, Jan and Höcht, Stephan and Schoutens, Wim, Are Banks Now Safer? What Can We Learn from the CoCo Markets? (August 20, 2015). Available at SSRN: https://ssrn.com/abstract=2648035 or http://dx.doi.org/10.2139/ssrn.2648035

Jan De Spiegeleer

RiskConcile ( email )

Kapeldreef 60
Leuven, 3000
Belgium
492227143 (Phone)

HOME PAGE: http://www.riskconcile.com

Stephan Höcht

Independent

Wim Schoutens (Contact Author)

KU Leuven - Department of Mathematics ( email )

Celestijnenlaan 200 B
Leuven, B-3001
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
166
Abstract Views
844
rank
224,159
PlumX Metrics