Article,
CoCo Issuance and Bank Fragility
National Bureau of Economic Research Working Paper Series, (November 2017)
DOI: 10.3386/w23999
Abstract
Author contact info: Stefan Avdjiev Bank for International Settlements Centralbahnplatz 2 Basel 4002, Switzerland E-Mail: stefan.avdjiev@bis.org Bilyana Bogdanova 4002 Basel Switzerland E-Mail: bilyana.bogdanova@bis.org Patrick Bolton Columbia Business School 804 Uris Hall New York, NY 10027 Tel: 212/854-9245 Fax: 212/854-8059 E-Mail: pb2208@columbia.edu Wei Jiang Graduate School of Business Columbia University 3022 Broadway, Uris Hall 803 Tel: 212/854-9002 E-Mail: wj2006@columbia.edu Anastasia Kartasheva E-Mail: Anastasia.Kartasheva@bis.org The promise of contingent convertible capital securities (CoCos) as a ” bail-in” solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. In this paper, we undertake the first comprehensive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling \$521 billion. Four main findings emerge: 1) The propensity to issue a CoCo is higher for larger and better-capitalized banks; 2) CoCo issues result in statistically significant declines in issuers' CDS spreads, indicating that they generate risk-reduction benefits and lower costs of debt. This is especially true for CoCos that: i) convert into equity, ii) have mechanical triggers, iii) are classified as Additional Tier 1 instruments; 3) CoCos with only discretionary triggers do not have a significant impact on CDS spreads; 4) CoCo issues have no statistically significant impact on stock prices, except for principal write-down CoCos with a high trigger level, which have a positive effect.
