Bail-In Requirements and CoCo Bond Issuance

Abstract

CoCo bonds are a predestine instrument to enhance banks’ resilience as they combine the advantages of debt and equity instruments. Based on the combination thereof, CoCo bonds are counted either towards the going- (AT1) or gone-concern (T2) capital of a bank. In this paper, we empirically investigate, whether banks explicitly manage these characteristics to offset fundings gaps in the respective capital ratios. Based on a worldwide data set of 389 CoCo bonds from 2012 until 2018, we find that AT1 eligible CoCo bonds are used to manage the LR, while T2 eligible CoCo bonds do not influence the TLAC.

Keywords: bail-in capital, bank stability, capital management, capital regulation, TLAC

JEL Classification: G01, G21, G28, G33