Study of the contingent convertible bonds and its regulatory impact

Abstract

The financial crisis in 2008 and 2009 led the regulatory authorities to place stricter capital requirements on banks (Basel III). Contingent Convertible (CoCos) bonds were introduced as way to acquire the extra capital, to reduce bank failures and cushion the next crisis more reliably than existing subordinated debt. CoCos are hybrid subordinated bonds that have the properties of both bonds and equity, and can also fulfil a bank’s capital requirements as mandated by regulators. From the bank's perspective, CoCos are appealing because the coupon payments are tax-deductible and the cost of capital is lower than it is for issuance of shares.