2017年-BIS国际清算银行_CoCo_issuance_and_bank_fragility_77页_1021kb

CoCo Issuance and Bank Fragility Summary

Core Content

This paper presents the first comprehensive empirical analysis of bank contingent convertible capital (CoCo) issuance, focusing on the effects of CoCos on bank fragility and the factors influencing their issuance. The study is based on a dataset of 731 CoCo issues, totaling $521 billion, issued by banks between 2009 and 2015.

Main Findings

1. Issuance Propensity

• Larger and better-capitalized banks are more likely to issue CoCos.
• Banks with impaired balance sheets are less likely to issue CoCos, which is consistent with the authors' theoretical model.
• Shareholders are more inclined to issue CoCos that offer them greater benefits, such as principal write-down (PWD) CoCos with high trigger levels.

2. Impact on Credit Risk and Debt Cost

• CoCo issuance leads to statistically significant declines in CDS spreads, indicating a reduction in credit risk and lower debt costs.
• The effect is stronger for CoCos that convert into equity compared to PWD CoCos.
• CoCos with mechanical triggers have a more significant negative impact on CDS spreads than those with only discretionary triggers.
• High-trigger CoCos are associated with a stronger reduction in credit risk than low-trigger ones.

3. Impact on Stock Prices

• Overall, CoCo issuance has no significant impact on stock prices.
• However, PWD CoCos with high trigger levels do have a positive and statistically significant impact on equity prices.

4. Market Reaction to CoCo Design

• CoCos with mechanical triggers are perceived as more credible and predictable by the market, reducing uncertainty about regulatory intervention.
• The presence of mechanical triggers reduces the likelihood that CoCos are viewed as "gone concern" instruments, which are associated with uncertainty.

Key Contract Features

• Trigger Types:

  • Discretionary Trigger: Allows regulators to activate loss absorption if the bank is deemed non-viable.
  • Mechanical Trigger: Based on capital ratios (e.g., CET1/RWA), typically book value-based.

• Loss Absorption Mechanisms:

  • Mandatory Conversion (MC): Converts debt into equity at a pre-defined rate, increasing CET1 capital.
  • Principal Write-Down (PWD): Reduces the principal amount of the CoCo, repairing the bank's balance sheet.

• Regulatory Classification:

  • AT1 (Additional Tier 1): Must include a mechanical trigger with a minimum CET1/RWA level of 5.125%.
  • T2 (Additional Tier 2): May have only discretionary triggers.

Policy and Design Considerations

1. Trigger Design

• Book Value vs. Market Value Triggers:

  • Book value triggers are less responsive to sudden crises due to infrequent reassessment and potential inaccuracies in internal risk models.
  • Market value triggers respond more quickly to news about bank losses but may be susceptible to price manipulation and noise trading.

• Infinite Maturity CoCos:

  • These are more robust to price manipulation and reduce the multiple equilibrium problem associated with CoCos.

2. Risk-taking Incentives

• PWD CoCos may encourage excess risk-taking around the trigger level.
• MC CoCos may incentivize accounting manipulation to delay conversion.
• High-trigger, dilutive MC CoCos are less attractive to equity holders due to the "debt overhang" effect.
• However, equity holders may still have incentives to issue CoCos if they benefit from reduced default risk (e.g., lower costs of debt rollover).

Market and Regulatory Context

• The CoCo market has grown significantly since the 2007-09 Global Financial Crisis, driven by Basel III requirements.
• The market is now large enough to support systematic empirical analysis.
• CoCos are issued in various currencies, with the majority in euros, US dollars, and local currencies.
• CoCos issued by European banks account for 39% of the market, while non-European advanced economies account for 14%.
• Emerging market economies (EMEs) account for over 46% of the CoCos issued by the end of 2015, primarily in T2 form.

Open Questions and Future Directions

• The paper raises questions about the future design of CoCos, particularly regarding the balance between market-based and accounting-based triggers.
• It also discusses the need for further research on how different CoCo features influence bank behavior and the effectiveness of CoCos in reducing bank fragility.

Conclusion

The study concludes that CoCo issuance generally contributes to reducing bank fragility, especially when they have mechanical triggers and are classified as AT1 capital. However, not all CoCos are equally effective, and the design of these instruments plays a crucial role in determining their impact on bank balance sheets and credit risk.