The twofold attraction of CoCos is that they could help financial firms meet regulatory capital requirements and automatically absorb losses in times of financial distress-independent of government intervention.
In short, effective CoCos should help provide financial institutions with a sufficient cushion following a conversion, thereby assuring both market participants and regulators of those institutions' ability to continue in business even after experiencing a significant loss of capital.
Although regulators in many nations allow CoCos to satisfy some part of banks' regulatory capital requirements, the $521 billion of CoCos employed for this purpose thus far remains quite small compared to the approximately $5.3 trillion of bank equity capital worldwide.
In Europe, Basel III capital standards explicitly provide for CoCos to count toward Tier 1 and Tier 2 capital, but only in limited amounts and only when those CoCos possess certain characteristics.
The current regulatory approach to incorporating CoCos into capital requirements, which predated much of the recent work on how CoCos should be structured, does not meet the standards of optimal design that would enable them to function effectively.
For a comprehensive discussion of the case for CoCos and the key criteria they must satisfy, see George M. von Furstenberg, "Contingent Capital to Strengthen the Private Safety Net for Financial Institutions: Cocos to the Rescue?" Bundesbank Series 2 Discussion Paper no.
In Contingent Convertibles, von Furstenberg argues that for CoCos to be attractive capital market investments, they must be able to help meet regulatory capital requirements, be rated investment grade, and have tax-deductible interest payments.
https://www.cato.org/publications/policy-analysis/bailouts-capital-or-cocos-can-contingent-convertible-bonds-help-banks
In short, effective CoCos should help provide financial institutions with a sufficient cushion following a conversion, thereby assuring both market participants and regulators of those institutions' ability to continue in business even after experiencing a significant loss of capital.
Although regulators in many nations allow CoCos to satisfy some part of banks' regulatory capital requirements, the $521 billion of CoCos employed for this purpose thus far remains quite small compared to the approximately $5.3 trillion of bank equity capital worldwide.
In Europe, Basel III capital standards explicitly provide for CoCos to count toward Tier 1 and Tier 2 capital, but only in limited amounts and only when those CoCos possess certain characteristics.
The current regulatory approach to incorporating CoCos into capital requirements, which predated much of the recent work on how CoCos should be structured, does not meet the standards of optimal design that would enable them to function effectively.
For a comprehensive discussion of the case for CoCos and the key criteria they must satisfy, see George M. von Furstenberg, "Contingent Capital to Strengthen the Private Safety Net for Financial Institutions: Cocos to the Rescue?" Bundesbank Series 2 Discussion Paper no.
In Contingent Convertibles, von Furstenberg argues that for CoCos to be attractive capital market investments, they must be able to help meet regulatory capital requirements, be rated investment grade, and have tax-deductible interest payments.
https://www.cato.org/publications/policy-analysis/bailouts-capital-or-cocos-can-contingent-convertible-bonds-help-banks
No comments:
Post a Comment