The agency of CoCos: Why contingent convertible bonds aren't for everyone

Most regulators grant contingent convertible bonds the status of equity. The theory, however, suggests that these securities can distort banks’ incentives to issue new equity. Using a model and European data, this column shows that banks with lower risk are more likely to issue CoCos compared to their riskier counterparts. In line with Basel III, banks are expected to raise equity prior to CoCo conversion, which makes the bonds an expensive source of capital. The design of CoCos should be revised if they are to enjoy equity-like treatment.