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Title:Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue? PDF Logo
Authors:von Furstenberg, George M.
Issue Date:2011
Series/Report no.:Discussion Paper Series 2: Banking and Financial Studies 2011,01
Abstract:This study examines the promise of reducing expected resolution costs of financial institutions through either voluntary or mandated addition of contingently convertible debt securities to their long-term financing mix. I model the stochastic process by which an initially very well capitalized banking firm may come to violate its minimum capital maintenance requirement. Conversion of cocos then provides a second chance because the firm's initial capitalization is restored. Although regulatory insolvency remains a distant threat, the expected reductions in the cost of bankruptcy and hence the cost of capital are such that cocos may win a place in the liability structure of financial institutions without the need for mandates.
Subjects:financial reforms
regulatory insolvency
contingent capital
bank regulations
cocos
JEL:E44
G33
G38
ISBN:978-3-86558-679-7
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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