Financial hybrids were introduced by Basel II together with the tier-based structure of capital. This system has failed in the sense that it did not provide a sufficient level of loss-absorption capacity on a going- concern basis. One of the reasons for this was that hybrids did not embed contingent conversion. Post-crisis rules and regulations implemented enhanced levels of capital in general. Apart from quantitative effects, one may point to qualitative gains that have been achieved from the issuance of CoCos. The issuing of CoCos may improve solvability if these bonds are properly structured. We will present a model showing how a CoCo may improve total solvability of an individual issuer, also taking into account the relatively higher interest CoCos pay in comparison to senior debt notes.
KeywordsEuro Area Contagion Effect Surplus Process Swiss National Bank Contagion Risk
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