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Contingent Convertible bond literature review: making everything and nothing possible?

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  • Philippe Oster

    (Zeppelin University Friedrichshafen)

Abstract

Contingent Convertible (CoCo) bonds are subject to a considerable theoretical and practical debate. This article presents a systematic literature survey from five databases between 2002 and June 30, 2018, based on a content analysis approach. I do so by analyzing the multidisciplinary linking points of 244 CoCo-related publications from 27 countries. This literature review considers—in addition to peer-reviewed journal articles—first-tier gray literature in order to receive the most comprehensive picture possible. Although CoCos that qualify for Basel III have various advantages such as less social costs due to optimal capital regulation and equilibrium leverage, lower default risk, cheaper financing and enhanced returns for issuers, they cause at least as many undesirable effects in the field of moral hazard such as the preference for higher risk-taking of management and equity holders or the acceptance of elevated asset volatility as a result of the high wealth transfer risk for CoCo holders. The explanations for the established CoCo design are multifaceted and vary greatly. In academia, caution needs to be exercised on the tendency to over-engineer the possible future design of CoCos and the myriad of outcomes.

Suggested Citation

  • Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    • Handle: RePEc:pal:jbkreg:v:21:y:2020:i:4:d:10.1057_s41261-019-00122-z
    DOI: 10.1057/s41261-019-00122-z
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    Cited by:

    1. Lionel Melin & Ahyan Panjwani, 2024. "Optimal Design of Contingent Capital," Finance and Economics Discussion Series 2024-051, Board of Governors of the Federal Reserve System (U.S.).
    2. Kund, Arndt-Gerrit & Hertrampf, Patrick & Neitzert, Florian, 2023. "Bail-in requirements and CoCo bond issuance," Finance Research Letters, Elsevier, vol. 53(C).
    3. Raviv, Alon & Hilscher, Jens & Peleg Lazar, Sharon, 2021. "Designing bankers' pay: Using contingent capital to reduce risk-shifting," MPRA Paper 106596, University Library of Munich, Germany.

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    More about this item

    Keywords

    Contingent Convertible (CoCo) bonds; Security design; Basel III regulation; Point of Non-Viability (PoNV); Moral hazard;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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