Contingent Capital to Strengthen the Private Safety Net for Financial Institutions: Cocos to the Rescue?

88 Pages Posted: 8 Jun 2016

Date Written: 2011

Abstract

This study examines the promise of reducing expected resolution costs of financial institutions through either voluntary or mandated addition of contingently convertible debt securities to their long-term financing mix. I model the stochastic process by which an initially very well capitalized banking firm may come to violate its minimum capital maintenance requirement. Conversion of cocos then provides a second chance because the firm's initial capitalization is restored. Although regulatory insolvency remains a distant threat, the expected reductions in the cost of bankruptcy and hence the cost of capital are such that cocos may win a place in the liability structure of financial institutions without the need for mandates.

Keywords: financial reforms, regulatory insolvency, contingent capital, bank regulations, cocos

JEL Classification: E44, G33, G38

Suggested Citation

von Furstenberg, George M., Contingent Capital to Strengthen the Private Safety Net for Financial Institutions: Cocos to the Rescue? (2011). Bundesbank Series 2 Discussion Paper No. 2011,01. Available at SSRN: https://ssrn.com/abstract=2794056

George M. Von Furstenberg (Contact Author)

Indiana University ( email )

Department of Economics
Wylie Hall, Indiana University
Bloomington, IN 47405-6620
United States
812-856-1382 (Phone)
812-855-3736 (Fax)

HOME PAGE: http://mypage.iu.edu/~vonfurst/

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