Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2017-10-06
Number: 17-095/VI
Author-Name: Gera Kiewiet
Author-Email: g.kiewiet@dnb.nl
Author-Workplace-Name: DNB. The Netherlands
Author-Name: Iman van Lelyveld
Author-Email: i.p.p.van.lelyveld@dnb.nl
Author-Workplace-Name: DNB, VU Amsterdam and Tinbergen Institute, The Netherlands
Author-Name: Sweder van Wijnbergen
Author-Workplace-Name: University of Amsterdam, CEPR, Tinbergen Institute, The Netherlands
Title: Contingent Convertibles: Can the Market Handle them?
Abstract: The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.
Classification-JEL: G01, G21, G32
Keywords: Contagion, Contingent Convertible Capital, Systemic Risk
File-Url: https://papers.tinbergen.nl/17095.pdf
File-Format: application/pdf
File-Size: 1066772 bytes
Handle: RePEc:tin:wpaper:20170095