Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/177663
Authors: 
Kiewiet, Gera
van Lelyveld, Iman
van Wijnbergen, Sweder
Year of Publication: 
2017
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 17-095/VI
Abstract: 
The recent financial crisis has led to the introduction of contingent convertible instruments (CoCos) in the capital framework for banks. Although CoCos can provide benefits, such as automatic recapitalization of troubled banks, their inherent risks raise questions about whether they increase the safety of the banking system. We show that concerns about CoCos in just a single bank can result in the decline of an entire market, with investors apparently unable to distinguish safe from risky bonds. In times of market-panic, investors tend to rely on credit ratings instead of estimating the real risks of missing coupon payments. We provide several recommendations to improve the capital requirements regime for banks.
Subjects: 
Contagion
Contingent Convertible Capital
Systemic Risk
JEL: 
G01
G21
G32
Document Type: 
Working Paper

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