World Scientific-now publishers Series in Business > Contingent Convertibles (CoCos): A Potent Instrument for Financial Reform

Contingent Convertibles (CoCos): A Potent Instrument for Financial Reform

George M. von Furtstenburg, Indiana University, USA,
Published: 12 Aug 2014
© 0 G. M. von Furtstenburg
Money and bankingInvestmentsFinancial markets and institutions

Table of contents:
Part 1. Foundations
1. Introduction
2. Overview of Basel III Implementation Most Relevant for Cocos
3. Cocos and the Struggle to Preserve Going-Concern Value
4. The Treatment of TBTF Financial Institutions in the Last Crisis
5. Strategic Policy Objectives in Privatizing the TBTF Backstop
Part 2. Why Cocos?
7. High-Trigger Cocos Compared with Other Bailinable Debt
8. Self-Insurance with Cocos Compared to Common Equity
9. Automatic Cocos Conversion vs. Voluntary Restructuring
10. Reasons for Having Cocos Liabilities on the Balance Sheet
Part 3. Varieties of Cocos Design and Rationales
11. Determining Conversion Price and Risk Premium in Cocos
12. Write-Down-Only Cocos
13. Actual or Prospective Recovery Rates from Converting Cocos
14. Government Capital Injections and Bailout Cocos
15. Misuses of Cocos in Government-Led Recapitalizations of Banks
Part 4. Policy Choices and Essentials for Cocos' Success
16. The Tax Treatment of the Interest Paid on Cocos
17. Major Credit Rating Agencies' Approaches to Rating Cocos
18. Regulatory Requirements at Cross-Purposes
19. Conclusions and Recommendations for Cocos Design and Evaluations

Contingent Convertibles (CoCos)

Contingent Convertibles (CoCos) represent debt that is subject to being converted automatically into common equity under pre-specified terms of conversion if the chosen regulatory capital ratio falls to a level triggering conversion. CoCos are that subspecies of contingent capital that references regulatory (Basel III) concepts in its triggers. From 2014, trigger points are set by common equity (Common Equity Tier 1 [CET1]) in percent of risk-weighted assets [RWA] or of more complicated measures of total exposure to a variety of risks, particularly credit risk. This is the first comprehensive book on CoCos, an innovative instrument that has attracted growing attention since it was first issued in 2009.

The book is mostly concerned with going-concern ‘recovery-’ rather than ‘resolution-’ CoCos, because avoiding failure and costly disruption of financial networks without government financing is the first order of business. CoCos hold a high promise of providing fully loss-absorbing equity capital when it is most needed and least available to financial institutions. Yet, having grown out of the 2007–2009 financial crisis, they are still an ‘infant’ reform instrument in many respects. Few of the instrument's design features (or even the rating, regulatory, and tax treatments) are entirely settled. This book seeks to move the discussion toward, and then past, the main decision points so that CoCos can prove their value for contingency planning and self-insurance all over the world. It is intended to increase the ability of issuers and investors to analyze and understand the different kinds of CoCos.

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