How Are Coco Bonds Perceived? Going Concern, Gone Concern, or None of the Above?

54 Pages Posted: 12 Jul 2021 Last revised: 15 Jul 2021

See all articles by Mouctar Bah

Mouctar Bah

Ghent University - Department of Financial Economics

Koen Inghelbrecht

Ghent University - Department of Economics

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE); Ghent University - Department of General Economics

Nicolas Soenen

Ghent University - Department of Economics

Rudi Vander Vennet

Ghent University - Department of Financial Economics

Date Written: July 8, 2021

Abstract

We investigate the effectiveness of CoCo bonds as a credible recapitalization or resolution tool for distressed banks in Europe. Using yields on CoCo and senior bank bonds, we construct a CoCo premium to capture bank stress and we analyze whether or not this premium is related to bank systemic risk, captured by the marginal expected shortfall (MES), as well as individual bank risk. We find that increases of the CoCo spread are positively associated with both bank systemic risk and bank default risk. These results suggest that market participants do not consider CoCo bonds as ‘going concern’ capital. Since we also find that senior and subordinated bondholders perceive the probability of a bail-in as higher during times of an elevated CoCo premium, this implies that CoCo bonds are not considered as a credible recovery or resolution tool under the BRRD regime. Furthermore, the impact of CoCo bonds is not limited to bank-specific systemic and credit risk but also affects the risk profile of other banks. Our results suggest that policy actions are needed to render the European bank bail-in regime more credible.

Keywords: Systemic risk, CoCo bonds, contagion, risk premia

JEL Classification: G01, G1, G12, G21

Suggested Citation

Bah, Mouctar and Inghelbrecht, Koen and Schoors, Koen J. L. and Soenen, Nicolas and Vander Vennet, Rudi, How Are Coco Bonds Perceived? Going Concern, Gone Concern, or None of the Above? (July 8, 2021). Available at SSRN: https://ssrn.com/abstract=3882764 or http://dx.doi.org/10.2139/ssrn.3882764

Mouctar Bah

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

Koen Inghelbrecht

Ghent University - Department of Economics ( email )

Sint-Pietersplein 5
Ghent, B-9000
Belgium
+32 9 264 89 77 (Phone)

HOME PAGE: http://users.ugent.be/~kjinghel/

Koen J. L. Schoors

Ghent University - Centre for Russian International Socio-Political and Economic Studies (CERISE) ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 265 35 99 (Fax)

Ghent University - Department of General Economics ( email )

Tweekerkenstraat 2
Ghent, 9000
Belgium
+32 9 264 34 78 (Phone)
+32 9 264 35 99 (Fax)

Nicolas Soenen (Contact Author)

Ghent University - Department of Economics ( email )

Belgium

Rudi Vander Vennet

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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

Paper statistics

Downloads
88
Abstract Views
505
Rank
427,530
PlumX Metrics