Contingent Convertibles: Can the Market Handle Them?

Tinbergen Institute Discussion Paper 17-095/VI

39 Pages Posted: 9 Oct 2017 Last revised: 11 Oct 2017

See all articles by Gera Kiewiet

Gera Kiewiet

De Nederlandsche Bank

Iman van Lelyveld

De Nederlandsche Bank; Vrije Universiteit Amsterdam

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 6, 2017

Abstract

The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.

Keywords: contagion, contingent convertible capital, systemic risk

JEL Classification: G01, G21, G32

Suggested Citation

Kiewiet, Gera and van Lelyveld, Iman and van Wijnbergen, Sweder, Contingent Convertibles: Can the Market Handle Them? (October 6, 2017). Tinbergen Institute Discussion Paper 17-095/VI. Available at SSRN: https://ssrn.com/abstract=3048806 or http://dx.doi.org/10.2139/ssrn.3048806

Gera Kiewiet (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Iman van Lelyveld

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam ( email )

Netherlands

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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