No. 1201 - Contagion in the CoCos market? A case study of two stress events

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by Pierluigi Bologna, Arianna Miglietta and Anatoli SeguraNovember 2018

The paper studies the European contingent convertible bonds (CoCos) market. CoCos are debt securities issued by a bank that, were the bank facing difficulties, can be converted into equity, written-off or coupon payments can be forgiven in order to strengthen the solvency of the bank as a going concern. The paper studies in particular the yield-to-maturity dynamics of CoCos during two stress episodes that involved a European systemically important bank in 2016.

The paper finds that there was contagion from the CoCos of the systemically important bank in distress to those issued by other banks. This could have been caused by a generalized reassessment of the riskiness of these securities by investors. The initial uncertainty about possible suspension of coupon payments by the supervisory authority could have also contributed to the contagion.

Forthcoming in: International Journal of Central Banking

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