CoCos and bank resolution: Overcoming March stigma

CoCos and bank resolution: Overcoming March stigma

Fecha: enero 2024

Ángel Berges and Salvador Jiménez

Convertible bonds

SEFO, Spanish and International Economic & Financial Outlook, V. 13 N.º 1 (January 2024)

Contingent convertible bonds (known as CoCos), which are additional tier 1 (AT1) instruments, have been the instrument of choice for European and Spanish banks looking to reinforce their capital since the financial crisis and, more importantly, the cornerstone of the bank resolution mechanism insofar as they constitute loss absorbing instruments in the event of resolution. As a result, the market for CoCos has emerged as a very important barometer, as or more important than the market for banks’ shares, for measuring confidence in the banking system. That is why this market suffered a rout during the banking crisis of last March and was hit particularly hard by how the Swiss authorities treated Credit Suisse’s CoCo creditors, creating “stigma” around the instrument in general. The way CoCos were bailed in when Credit Suisse was rescued created a stigma that prompted the global CoCo market to collapse. Nonetheless, the market has recovered in recent months, marked by a significant rebound in prices and, above all, in issuance activity.

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