Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/220047 
Authors: 
Year of Publication: 
2020
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2020-010/IV
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
In this paper we develop a theoretical model to investigate the effect on a bank's financial stability of having multiple contingent convertible bonds buffers (CoCos) on the same bank balance sheet, using cash-in-the-market pricing and global games methodologies. Contingent convertible bonds are meant to act as a bail-in mechanism for banks, where CoCo debt converts into equity when a bank needs it the most. We find that having CoCo buffers which trigger at different capitalisation levels can be detrimental for the CoCo bail-in capacity. Market-based triggers lead to premature conversion and fire-sales of equity. In contrast with existing literature, we show that book-based trigger CoCos yield an optimal outcome, as long as they incorporate expected credit losses.
Subjects: 
contingent convertible bonds
fire sales
financial stability
JEL: 
G38
G21
G32
Document Type: 
Working Paper

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