Can CoCo-Bonds Mitigate Systemic Risk?

41 Pages Posted: 27 Sep 2019 Last revised: 2 Dec 2019

See all articles by Arndt-Gerrit Kund

Arndt-Gerrit Kund

University of Cologne - Department of Banking

Matthias Petras

University of Cologne - Department of Banking; University of Cologne; University of Cologne - Faculty of Management, Economics and Social Sciences

Date Written: September 18, 2019

Abstract

After the 2007 financial crises, the idea of contingent convertible (CoCo) capital was revived and manifold proposed as a means to stabilize individual banks, and hence the entire banking system. The purpose of this paper is to empirically test, whether CoCo-bonds indeed improve the stability of the banking system and reduce systemic risk. Using the broadly applied SRISK metric, we obtain contradicting results, based on the classification of the CoCo-bond as debt or equity. We remedy this short-coming by proposing an adjustment to the original SRISK formula that now correctly accounts for CoCo-bonds. Using empirical tests, we show that the undue disparity has been solved by our adjustment, and that CoCo-bonds reduce systemic risk.

Keywords: CoCo-bonds, Financial Stability, Systemic Risk

JEL Classification: G01, G21, G33

Suggested Citation

Kund, Arndt-Gerrit and Petras, Matthias, Can CoCo-Bonds Mitigate Systemic Risk? (September 18, 2019). Available at SSRN: https://ssrn.com/abstract=3455924 or http://dx.doi.org/10.2139/ssrn.3455924

Arndt-Gerrit Kund (Contact Author)

University of Cologne - Department of Banking ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
+492214702628 (Phone)

Matthias Petras

University of Cologne - Department of Banking ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://www.bankseminar.uni-koeln.de/en/seminar/staff/staff/petras/

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Richard-Strauss-Str. 2
Cologne, D-50923
Germany

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