Contingent convertible bonds (Cocos): do Cocos enhance financial institutions- resilience?

Abstract

This study analyzes whether Contingent Convertible Bonds (CoCos) contribute to reduce the default risk of banks and insurance firms. An event study was performed to measure CoCos’ announcement effects on Credit Default Swaps(CDS)premiums. Within banks, we conclude that CoCos with a Temporary Write-Down (TWD CoCos), CoCos which convert when CET1 Ratio falls below5.125% (Low Trigger CoCos),and Equity Convertible CoCos which transfer high amounts of wealth to shareholders at conversion (High Marginal Wealth Transfer EC CoCos)are more effective in reducing default risk. Moreover, we find that CoCos contributed to decrease CDS premiums during the Covid-19 pandemic.