Contingent Convertible Bonds And Public Policy: A New Approach

Abstract

I investigate financial instruments called contingent convertible bonds (CoCos). CoCos are designed to recapitalize banks during financial crises. Regulation would mandate their issuance. I survey the structure of financial crises and develop a rationale for the instruments, then propose a specific set of characteristics for the bonds. Given those characteristics, I develop a pricing model and explore some implications of a regulatory mandate for their issuance. I conclude by rejecting them as a policy alternative.