Contingent Convertible Obligations and Financial Stability

This paper investigates whether a financial system can be made more stable if institutions share risk by exchanging contingent convertible (CoCo) debt obligations. The question is framed in network model of and equity interlinkages with the addition variant CoCo that converts continuously when bank’s equity–debt ratio drops to trigger level. main theoretical result complete characterization clearing problem for interbank at maturity We then introduce stylized networks study introducing bonds improves stability, as well specific which do not provide uniformly improved performance. To return question, we examine European Union time 2011 Banking Authority stress test comparative statics implications on stability. It found replacing all unsecured standardized securities, systemic will decrease bank shareholder value increase.