Coco-Bonds as a Method of Equity Boost

Academic Paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,7, International School Of Management, Campus Frankfurt, language: English, abstract: This term paper will start with describing some basic characteristics of Coco-Bonds and their market behaviour. This first chapter should help to understand the product itself and its features. Afterwards the basic idea behind Basel III and resulting regulations under CRD and CRR are described and linked to Coco-Bonds as a product. In the last chapter it is discussed whether and under which circumstances Coco-Bonds belong to the equity capital of a bank and thus strengthen the equity base. After the financial crisis in 2008 one of the main objectives the regulatory- and supervisory authority had, was to strengthen and increase the equity base of banks. This should ensure a better preparation for coming crises. In October 2011 the Basel Committee set the stage for a financial product, allowing it to play a ma-jor role in building up regulatory equity capital, as defined in Basel III. The product to reach the regulatory requirements are Contingent Convertible Bonds (short: Coco-Bonds). These bonds are a niche financial product which, as a result of the increasing regulatory requirements, in recent years were often issued by banks. Although these securities are issued as a bond with a fixed coupon, in case of a certain event, the Coco-Bonds are converted into equity or are written off. Due to this, Coco-Bonds often pay a high coupon rate, which could make them, especially within the currently low interest rate environment, look like an attractive investment. However a high coupon payment always means a related risk.