Coco Issuance and Bank Fragility

77 Pages Posted: 11 Dec 2017

See all articles by Stefan Avdjiev

Stefan Avdjiev

Bank for International Settlements (BIS)

Bilyana Bogdanova

Bank for International Settlements (BIS) - Monetary and Economic Department

Patrick Bolton

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Wei Jiang

Columbia Business School - Finance and Economics

Anastasia V. Kartasheva

International Association of Insurance Supervisors, c/o Bank for International Settlements

Multiple version iconThere are 3 versions of this paper

Date Written: November 2017

Abstract

The promise of contingent convertible capital securities (CoCos) as a 'bail-in' solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. In this paper, we undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521 billion. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCo issues result in statistically significant declines in issuers' CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.

Keywords: CoCos, Contingent Convertible Capital, Bank Capital Regulation, Basel III

JEL Classification: G01, G21, G28, G32

Suggested Citation

Avdjiev, Stefan and Bogdanova, Bilyana and Bolton, Patrick and Jiang, Wei and Kartasheva, Anastasia V., Coco Issuance and Bank Fragility (November 2017). BIS Working Paper No. 678. Available at SSRN: https://ssrn.com/abstract=3076413

Stefan Avdjiev (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Bilyana Bogdanova

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Patrick Bolton

Columbia Business School - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Wei Jiang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Anastasia V. Kartasheva

International Association of Insurance Supervisors, c/o Bank for International Settlements ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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