Monday, July 14, 2014

Caveat emptor! Contingent Convertible Capital Instruments CoCos

Contingent Convertible Capital Instruments CoCos, which counts as Additional Tier 1 debt, and which could be forced to convert only because a regulatory change in risk-weights, or in the risk appreciation of some assets by credit rating agencies, or because of bank manipulations is pure lunacy for all… especially for investors.

Could investors sue regulators for forcing them to convert? What responsibilities have regulators on informing investors about the possibilities of conversion?

If getting close to a conversion do banks have an obligation toward investors to sell assets with high risk weights in order to avoid conversion, or can the banks instead take on assets with high risk weights in order to force conversion on investors?

The only cocos that make sense, are those based on a leverage ratio (not risk-weighted)…for instance not less than 6 percent.