Fidest – Agenzia giornalistica/press agency

Quotidiano di informazione – Anno 33 n° 335

New ‘CoCo’ bonds may worsen financial crisis situations

Posted by fidest press agency su lunedì, 24 novembre 2014

Technische Universität MünchenBanks are increasingly issuing ‘CoCo’ bonds to boost the levels of equity they hold. In a crisis situation, bondholders are forced to convert these bonds into a bank’s equity. To date, such bonds have been regarded only as a means of averting a crisis. A study by economists at Technische Universität München (TUM) and University of Bonn now shows that if such bonds are badly constructed, they worsen a crisis instead of stabilizing the banking system – because they incentivize a bank’s owners to worsen a bank’s situation themselves so as to leave bondholders out in the cold. One lesson that policymakers and financial regulators have drawn from the financial market crisis is that banks need to be backed by more equity. But banks have found it hard to increase their core capital positions – in other words, the equity available to them long-term. Since 2009, this has led European banks to increasingly deploy an instrument that allows them to convert debt into equity in times of need: contingent convertible bonds, also known as CoCo bonds. Banks issue these bonds at fixed interest rates – as is normal with corporate bonds. The special aspect of CoCo bonds is that if banks fall short of their predetermined core capital ratio levels – mostly 7 percent – the bonds are converted into the banks’ equity. In other words, bondholders are forced to convert their securities into the banks’ shares, or even waive their claims entirely. Banks use these instruments as it is generally easier for them to place them on the market than shares, and they also entail tax advantages. For investors, CoCo bonds are interesting because they offer higher interest rates than other corporate bonds. Policymakers and regulators welcome them because banks that are in financial difficulties ‘bail in’ their bond creditors, rather than resorting directly to taxpayers to bail them out. This has led various European states and the European Central Bank to recognize CoCo bonds as bank equity capital. US Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Timothy Geithner concluded in 2010 that CoCo bonds could function as ‘shock absorbers’ in market upheavals.

Rispondi

Inserisci i tuoi dati qui sotto o clicca su un'icona per effettuare l'accesso:

Logo di WordPress.com

Stai commentando usando il tuo account WordPress.com. Chiudi sessione /  Modifica )

Google photo

Stai commentando usando il tuo account Google. Chiudi sessione /  Modifica )

Foto Twitter

Stai commentando usando il tuo account Twitter. Chiudi sessione /  Modifica )

Foto di Facebook

Stai commentando usando il tuo account Facebook. Chiudi sessione /  Modifica )

Connessione a %s...

 
%d blogger hanno fatto clic su Mi Piace per questo: