Coco bonds

Could contingent convertible bonds, or Cocos, stop a bank failing? Some regulators believe so...

Could contingent convertible bonds, or Cocos, stop a bank failing? Some regulators believe so. Cocos are just like normal bonds (IOUs) for as long as the bank holds enough capital to satisfy regulators it is solvent. However, should a bank's safety fund fall too far, the Coco bonds would convert into shares. So say a bank has own funds (including shareholders' equity) of £50m and risk-weighted assets (including £20m of Coco bonds) of £200m. Its capital ratio is (50/200) x 100% or 25%. But were the Coco bonds converted, this ratio becomes (70/180) x 100%, or 39%. Fine, but a sudden conversion of Cocos into equity at a troubled bank could start a fire sale of the bank's shares. That would finish the bank off anyway.

See Tim Bennett's video tutorial: Bond basics.

Recommended

The charts that matter: gold and bitcoin both slide
Global Economy

The charts that matter: gold and bitcoin both slide

Gold and its modern counterpart, bitcoin, both sold off this week. Here’s what’s happened to the charts that matter most to the global economy.
11 Sep 2021
The charts that matter: markets cheer Powell’s inaction
Global Economy

The charts that matter: markets cheer Powell’s inaction

Markets were holding their breath for most of the week ahead of the Fed's Jackson Hole Symposium but in the end they cheered Chair Jay Powell's inacti…
27 Aug 2021
The charts that matter: “growth scare” grips the markets
Global Economy

The charts that matter: “growth scare” grips the markets

Asset prices fell hard this week as investors reassessed the “reflation trade”. Here’s what’s happened to the charts that matter most to the global ec…
21 Aug 2021
I wish I knew what tapering was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what tapering was, but I’m too embarrassed to ask

Tapering is the reduction in quantitative easing provided by a central bank. But how does it work?
11 Aug 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
How you can profit from the power of the grey pound
Share tips

How you can profit from the power of the grey pound

Higher life expectancy and surging asset prices have proved a boon for the baby-boomer generation, which has accumulated vast wealth. Younger generati…
10 Sep 2021