Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2020-02-09
Number: 20-010/IV
Author-Name: Ioana Neamtu
Author-Workplace-Name: University of Amsterdam
Title: Multiple buffer CoCos and their impact on financial stability
Abstract: In this paper we develop a theoretical model to investigate the effect on a bank's financial stability of having multiple contingent convertible bonds buffers (CoCos) on the same bank balance sheet, using cash-in-the-market pricing and global games methodologies. Contingent convertible bonds are meant to act as a bail-in mechanism for banks, where CoCo debt converts into equity when a bank needs it the most. We find that having CoCo buffers which trigger at different capitalisation levels can be detrimental for the CoCo bail-in capacity. Market-based triggers lead to premature conversion and fire-sales of equity. In contrast with existing literature, we show that book-based trigger CoCos yield an optimal outcome, as long as they incorporate expected credit losses.
Classification-JEL: G38, G21, G32
Keywords: contingent convertible bonds, fire sales, financial stability
File-URL: https://papers.tinbergen.nl/20010.pdf
File-Format: application/pdf
File-Size: 668157 bytes
Handle: RePEc:tin:wpaper:20200010