Contingent Convertible Bonds

Contingent Convertible Bonds (CoCos) are hybrid bank capital instruments that automatically convert to equity or face principal writedown when predefined triggers occur, typically based on capital ratios. European banks have issued over €200 billion in CoCos since 2013 to meet Basel III requirements for loss-absorbing capacity. Triggers include regulatory capital ratios (usually 5.125% or 7% Common Equity Tier 1) or supervisor discretion at ‘point of non-viability.’ For example, Deutsche Bank’s CoCo bonds convert to shares if its CET1 ratio falls below 5.125%. CoCos offer higher yields than traditional bonds (often 5-8%) compensating for conversion risk. During the 2023 Credit Suisse crisis, AT1 CoCo bonds were written down to zero, shocking markets expecting equity to absorb losses first. This highlighted the complex risks in CoCo structures and regulatory discretion in resolution. CoCos represent financial innovation balancing bank stability needs with investor returns, though their behavior during systemic stress remains uncertain.