Systemic risks with Contingent Convertible Bonds : A simulated study in systemic risks of triggering CoCos in a stressed European banking system.

Sammanfattning: Ever since the great financial crisis of 2008 regulators have pushed toward more resilient banks, resulting in more demanding regulation and an increase of regulator’s insight and power. Through the revision of the BASEL framework, Contingent Convertible Bonds were introduced in 2010 as a part of regulatory capital and has since then grown increasingly popular. However, these instruments have never been tested in a stressed European financial system. Hence, there is no genuine information of how these instruments would behave. Neither have there been any published efforts in testing this through simulation, to the best of my knowledge. Using a temporally disaggregated augmentation of the EBA 2016 stress test, I simulate how the financial system would be affected by triggering the CoCos. Studying the implications of both low and high trigger instruments. Results indicate that there are low risks for a systemic fallout and showcases some notable differences as a result of CoCo design and type of trigger.