BIS Publishes a Working Paper on CoCo Issuance and Bank Fragility
BIS published a working paper on the issuance of contingent convertible capital securities (CoCos) and bank fragility. The promise of 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, BIS undertakes the first comprehensive empirical analysis of bank CoCos, which represent a market segment comprising over 730 instruments totaling USD 521 billion.
The working paper describes the current state of CoCo issuance and presents an overview of the sample data set. The data set used consists exclusively of CoCos issued by banks and excludes those issued by insurance companies and other non-bank financial institutions. The focus is on CoCos that have at least one (mechanical or discretionary) contractual trigger. The paper highlights that two sets of empirical exercises were conducted. The first exercise examined the determinants of CoCo issuance while the second exercise evaluated the impact of CoCo issuance on the credit default swap (CDS) spreads and equity prices of issuing banks. The empirical analysis leads to the following four main findings:
- The propensity to issue a CoCo is higher for larger and better-capitalized banks
- 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 convert into equity, have mechanical triggers, and are classified as Additional Tier 1 instruments
- CoCos with only discretionary triggers do not have a significant impact on CDS spreads
- 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
CoCos are hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level. CoCos can absorb losses either by converting into common equity or by suffering a principal write-down.
Related Link: Working Paper (PDF)
Keywords: International, Banking, CoCo, Basel III, Bank Capital Regulation, BIS
Previous Article
Bundesbank Updates Validation Rules Handbook and Q&A on AnaCreditRelated Articles
|
News
HKMA Decides to Maintain Countercyclical Capital Buffer at 2.5%HKMA announced that, in accordance with the Banking (Capital) Rules, the countercyclical capital buffer (CCyB) ratio for Hong Kong remains at 2.5%.
April 16, 2019
WebPage
Regulatory News
|
|
News
EP Approves Agreement on Package of CRD 5, CRR 2, BRRD 2, and SRMR 2The European Parliament (EP) approved the final agreement on a package of reforms proposed by EC to strengthen the resilience and resolvability of European banks.
April 16, 2019
WebPage
Regulatory News
|
|
News
FDIC Consults on Approach to Resolution Planning for IDIsFDIC approved an Advance Notice of Proposed Rulemaking (ANPR) and is seeking comment on ways to tailor and improve its rule requiring certain insured depository institutions (IDIs) to submit resolution plans.
April 16, 2019
WebPage
Regulatory News
|
|
News
EP Resolution on Proposal for Sovereign Bond Backed SecuritiesThe European Parliament (EP) published adopted text on the proposal for a regulation of the European Parliament and of the Council on sovereign bond-backed securities (SBBS).
April 16, 2019
WebPage
Regulatory News
|
|
News
PRA Seeks Input and Issues Specifications for Insurance Stress TestsPRA announced that it will conduct an insurance stress test for the largest regulated life and general insurers from July to September 2019.
April 15, 2019
WebPage
Regulatory News
|
|
News
PRA Finalizes Policy on Approach to Managing Climate Change RisksPRA published the policy statement PS11/19, which contains final supervisory statement (SS3/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change (Appendix).
April 15, 2019
WebPage
Regulatory News
|
|
News
EBA Single Rulebook Q&A: First Update for April 2019EBA published answers to nine questions under the Single Rulebook question and answer (Q&A) updates for this week.
April 12, 2019
WebPage
Regulatory News
|
|
News
EIOPA Statement on Application of Proportionality in SCR SupervisionEIOPA published a supervisory statement on the application of proportionality principle in the supervision of the Solvency Capital Requirement (SCR) calculated in accordance with the standard formula.
April 11, 2019
WebPage
Regulatory News
|
|
News
FED Updates Form and Supplemental Instructions for FR Y-9C ReportingFED updated the form and supplemental instructions for FR Y-9C reporting. FR Y-9C is used to collect data from domestic bank holding companies, savings and loan holding companies, U.S intermediate holding companies, and securities holding companies with total consolidated assets of USD 3 billion or more.
April 11, 2019
WebPage
Regulatory News
|
|
News
OSFI Finalizes Guidelines on Liquidity Adequacy and NSFR DisclosuresOSFI published the final Liquidity Adequacy Requirements (LAR) guideline and the net stable funding ratio (NSFR) disclosure requirements guideline.
April 11, 2019
WebPage
Regulatory News
|
