CoCo bonds decrease banks’ appetite for risk, paper argues
Properly-designed conversion triggers key to reducing risk incentives
Contingent convertible (or CoCo) bonds reduce banks' incentives to engage in asset risk-taking, argues a working paper published this month by the Netherlands Bank (DNB).
In Convertible bonds and bank risk-taking, Natalya Martynova and Enrico Perotti argue that CoCo bonds have a risk prevention as well as a risk-shifting effect. They say CoCo bonds are usually chosen when equity is unavailable and examine how the bonds affect banks' incentives in highly-leveraged states.
The authors focus on the
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