Contingent convertible bonds: Who invests in European CoCos?

ABSTRACT

Using a comprehensive data set on issuances and holdings of contingent convertible debt instruments (CoCos) issued by European banks, we investigate who invests in European CoCos. The results indicate that most European CoCos are not directly held by euro area investors. Foreign investors outside the euro area and investment funds located in Ireland and Luxembourg hold the large majority. Euro area banks, insurers and pension funds only have very limited direct exposures. Households in the euro area hold almost no direct positions in European CoCos, although there could be indirect holdings through non-euro area entities and euro area investment funds. Concerns for contagion through cross-holdings of CoCos by banks seem to be unwarranted.

KEYWORDS:

• Contingent convertible debt
• CoCos
• banks
• systemic risk
• securities holdings

JEL CLASSIFICATION:

• G11
• G21

Acknowledgements

The authors thank Stephanie Chan, Jakob de Haan, Natalya Martynova and participants at the DNB ‘Workshop on Bank Contingent Convertible Debt’ (2016) for useful comments. Data have been cleared by the ESCB Statistics Committee procedure for non-disclosure of confidential SHS data.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See, for example, Flannery (2016); Chan and Van Wijnbergen (2017);  Flannery (2016;  Martynova and Perotti (2015); Sundaresan and Wang (2015); Chan and Van Wijnbergen (2014); Hilscher and Raviv (2014); Calomiris and Herring (2013); Bolton and Samama (2012); Glasserman and Nouri (2012); Pennacchi, Vermaelen, and Wolff (2011).

² Several banks also issue ‘copies’ of the regular CoCos under the so-called Rule 144A creating an additional ISIN code for each CoCo. In total we have an additional 19 such instruments included in the holdings analysis.