The agency of CoCos: Why contingent convertible bonds are not for everyone

Goncharenko, Roman; Ongena, Steven; Rauf, Asad

doi:10.1016/j.jfi.2020.100882

Cited by 15 publications

(10 citation statements)

References 45 publications

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“…Previous theoretical literature on CoCos, which is surveyed above, has focused solely on EC and PWD CoCos. Meanwhile, as aforementioned, TWD is the most popular type of CoCo—accounting for almost half of all outstanding CoCos worldwide and in Europe by the number of issuances (Goncharenko, Ongena, and Rauf 2020). I demonstrate that the incentive effect of TWDs is considerably different from that of other types of CoCos.…”

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confidence: 99%

Fighting Fire with Gasoline: CoCos in Lieu of Equity

Goncharenko¹

2021

J of Money Credit Banking

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In this paper, I theoretically examine the ability of Contingent Convertible bonds (CoCos), a source of bank capital under Basel III, to reduce the bank's default risk. Although issuing CoCos adds a buffer to the bank's balance sheet, it may induce wrong incentives in the form of debt overhang and risk shifting. My results indicate that the most popular type of CoCos, temporary write-down (TWD), is least effective at mitigating default risk. Unlike other types of CoCos, TWDs continue affecting shareholders' incentives even after the trigger event, thereby, inducing an earlier endogenous default.

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confidence: 99%

Fighting Fire with Gasoline: CoCos in Lieu of Equity

Goncharenko¹

2021

J of Money Credit Banking

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“…The paper finds that some key design features of CoCos, such as a too high conversion price, lead the issuer bank to increase risk-taking. The literature has also shown that riskier banks are less likely to issue CoCos (Goncharenko, Ongena, and Rauf 2020). In a similar vein, Avdjiev et al (2020) show that the propensity to issue CoCos is higher for better capitalized banks.…”

Section: Related Literaturementioning

confidence: 87%

Contagion in the CoCos Market? A Case Study of Two Stress Events

2018

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Banca d'ItaliaThe post-crisis regulatory framework has fostered the development of the market for contingent convertible bonds (CoCos). These instruments allow for loss absorption as a going concern, but their critics warn about their potential destabilizing effects in stress situations. We analyze the dynamics of the European CoCos market during two stress episodes that occurred in 2016 and were triggered by news on substantial unexpected losses faced by a European systemic bank. Our econometric approach aims at disentangling the fundamental contagion channels of the distress of such bank to the rest of the market from a potential CoCo-specific contagion channel. We find evidence of significant CoCo-specific contagion in the first stress episode that could result from investors' reassessment of CoCos' riskiness or from uncertainty on their supervisory treatment. We do not find instead evidence of CoCospecific contagion in the second stress event, suggesting that as investors learn about the specificities of these instruments and their supervisory treatment, the CoCos market becomes more resilient.

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“…We also estimate the model with random effects to control for unobserved bank heterogeneity as a robustness check, as in most of earlier studies (Dinger and Vallascas, 2016; Goncharenko et al , 2021). We use both time and country fixed effects and where standard errors are clustered at the bank level.…”

Section: Methodsmentioning

confidence: 99%

“…The two empirical studies closest to ours are Avdjiev et al (2020) and Goncharenko et al (2017Goncharenko et al ( , 2021 who focus on European markets. They explore the determinants of CoCo issuance and their impact on risk-taking.…”

Section: Determinantsmentioning

confidence: 99%

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Determinants of CoCo issuance: liquidity and risk incentives

Abdallah

Fernández

2022

JFRC

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Purpose This paper aims to study the impact of (regulatory and nonregulatory) liquidity on contingent convertible (CoCo) issuance and the relationship between CoCos and asset quality. Design/methodology/approach The analysis of this study comprises two stages. In the first stage, the authors used a logit model to test whether banks with riskier assets as well as lower solvency and (regulatory and nonregulatory) liquidity are more likely to issue CoCos. In the second stage, the authors used univariate analysis and fixed effects regression to measure the impact of Additional Tier 1 (AT1) CoCos on the quality of the issuer’s assets. Findings The study shows that regulatory liquidity ratios are negatively related to CoCo issuance. This study also finds that the likelihood to issue CoCo is higher when banks have lower regulatory capital or are less risky. Asset quality is found to not change significantly after the issuance. All in all, these results suggest that while solvency regulation is primarily regarded as the main motivation for CoCo issuance, liquidity regulation also matters. Research limitations/implications Despite the fact that CoCos have been emerging as an alternative way to help banks meet regulatory capital requirements, the paper argues that the relation between liquidity regulation and CoCos should be taken into account. Originality/value This study presents an empirical analysis on the CoCos instrument, focusing on the relationship between AT1 CoCos and liquidity regulation. Therefore, it serves to fill a gap in the literature on the underlying forces behind CoCo issuance. Moreover, this study measures the impact of AT1 CoCos issuance on bank risk, particularly on the quality of the issuer’s assets.

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The agency of CoCos: Why contingent convertible bonds are not for everyone

Cited by 15 publications

References 45 publications

Fighting Fire with Gasoline: CoCos in Lieu of Equity

Fighting Fire with Gasoline: CoCos in Lieu of Equity

Contagion in the CoCos Market? A Case Study of Two Stress Events

Determinants of CoCo issuance: liquidity and risk incentives

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