Do Cocos Serve the Goals of Macroprudential Supervisors or Bank Managers?

Using a hand-collected, comprehensive sample of contingent capital bonds (CoCos) issued by banks over the 2009-2019 period, we identify shifts in CoCo design features that nullify their putative salutary macroprudential benefits. Increasingly, CoCos are issued without punitive wealth transfers from shareholders to bondholders, thereby removing incentives for bank managers to take preemptive, risk-reducing action in order to prevent the CoCo from triggering. Further, CoCo issuance can be used to circumvent supervisory discretion over bonus and dividend payouts. Bank managers are aware of these loopholes. Financial markets price CoCo design features in yield spreads upon issuance