PhD Lunch Seminars Amsterdam

Speaker(s)
Ioana Neamtu (University of Amsterdam)
Date
Tuesday, 21 November 2017
Location
Amsterdam

Contingent Convertible Bonds (CoCos) are promoted by regulators as a bail-in mechanism in times of distress. The CoCo debt converts into equity or it is written down at pre-specified trigger levels which indicate a bad state of the bank. The Systemically Important Financial Institutions (SIFIs) in Switzerland are the only banks world-wide to hold both high and low trigger going-concern CoCos on their balance sheet, due to a mandatory quota imposed by the Swiss National Bank. Drawing upon the Swiss example, we analyze the effects on CoCo conversion for banks with a two-layer CoCo capital structure. We find that this framework can be detrimental for the bank’s financial health, due to premature conversion and runs on equity. We argue that initial capital structure matters for the scope of inefficient conversion, and provide an argument against market based triggers. In contrast with existing literature, we show that book-based trigger CoCos can provide first best, as long as they incorporate expected credit losses.