Agency Costs of A Bail-In And CoCo Bonds Risk

A new study, "Agency Costs of a Bail-In," points to a new “in-vogue” investment, "CoCo bonds," or Contingent Convertible bonds, being marketed to institutions and high net worth individuals that, while appealing to yield hungry investors, might be masking risk – particularly if a bank were to fall prey to another financial crisis.

Issues with the CoCo bonds

The report, from Kenjiro Hori and Jorge Martin Ceron of the Birkebeck University in London, considers two issues with the CoCo bonds: wealth transfer and value destruction associated with an equity conversion or a write down.  Certain bonds,...