Are CoCo Bonds Suitable as Core Capital Instruments?

Dowd, Kevin

Abstract

Basel III introduced significant innovations in bank regulation. One of them is the minimum required leverage ratio. To help banks implementing the new measure , Basel III created two different core capital measures: Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1). Since raising capital for CET1 is expensive, other instruments are used to build up AT1 in case of need, like for example Contingent Convertible (CoCo), which can convert to equity or written-down when a bank is under stress. In this paper we show that CoCos are not suitable as regulatory core capital instruments. Problems of timing, incentives, systemic risk, regulatory discretion and regulatory capture make CoCos unreliable as core capital instruments, and regulators should not treat them as such.

Citation

Dowd, K. (2020). Are CoCo Bonds Suitable as Core Capital Instruments?. Journal of New Finance, 1(1), https://doi.org/10.46671/2521-2486.1000

• Journal Article Type: Article
• Online Publication Date: May 25, 2020
• Publication Date: May 25, 2020
• Deposit Date: Sep 18, 2024
• Journal: Journal of New Finance
• Print ISSN: 2521-2486
• Peer Reviewed: Peer Reviewed
• Volume: 1
• Issue: 1
• DOI: https://doi.org/10.46671/2521-2486.1000
• Public URL: https://durham-repository.worktribe.com/output/2867243