CoCo issuance and bank fragility

Abstract

The promise of contingent convertible capital securities (CoCos) as a ‘bail-in’ so-lution has been the subject of considerable theoretical analysis and debate, butlittle is known about their effects in practice. We undertake the first comprehen-sive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521billion. Four main findings emerge: 1) thepropensity to issue a CoCo is higher for larger and better-capitalized banks; 2)CoCo issues result in a statistically significant decline in issuers’ CDS spread,indicating that they generate risk-reduction benefits and lower costs of debt (thisis especially true for CoCos that convert into equity, that have mechanical trig-gers, and that are classified as Additional Tier 1 instruments); 3) CoCos withonly discretionary triggers do not have a significant impact on CDS spreads; and 4) CoCo issues have no statistically significant impact on stock prices, exceptfor principal write-down CoCos with a high trigger level, which have a positive effect.