Contingent Convertible bond literature review: making everything and nothing possible?
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ORIGINAL ARTICLE
Contingent Convertible bond literature review: making everything and nothing possible? Philippe Oster1
© Springer Nature Limited 2019
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. Keywords Contingent Convertible (CoCo) bonds · Security design · Basel III regulation · Point of Non-Viability (PoNV) · Moral hazard JEL Classification G01 · G12 · G21 · G28 · G32 · G33
Introduction The Contingent Convertible (CoCo) bond literature has expanded rapidly [1]. Thus, it contains a wide range of studies spanning a broad spectrum of disciplines, including economics, politics, regulatory as well as social issues. This study analyses the multidisciplinary linking points of CoCo literature, with a focus on the European Union (EU). The aim is to identify, summarize and bring the major findings from the existing literature on CoCos into context. According to the definition of Mishkin [2], the situation in 2007–2009 can be summarized as a financial crisis. Thereby, financial crisis research around the world has been done for many decades and goes back to the Great Depression of 1929 or even to the 1800s [3, 4]. As observed in previous * Philippe Oster p.oster@zeppelin‑university.net 1
Chair of Empirical Finance and Econometrics, Zeppelin University Friedrichshafen, Am Seemooser Horn 20, 88045 Friedrichshafen, Germany
crisis, intensive academic and policy discussions about similarities and differences between the systemic financial crisis of 2007 and past episodes have taken place. Leaving aside the questions to what extent the recent financial crisis was different from other crises and whether economic theories have failed or not, it has given rise to the new asset class of CoCos. CoCo bonds were first proposed by Flannery [5]. He called the newly proposed instruments Reverse Convertible Debentures (RCD). Today’s CoCos preserve the
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