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Contingent convertibles: Banks rebut case for CoCo market triggers

Tier 1 ratio or market solvency triggers?; Bankers fear proposal would create volatility

Bank of England executive director of financial stability Andrew Haldane’s

"Knowing that a trigger might be close to being pulled, and their claims converted, CoCo investors are likely to sit up and take notice"

Andrew Haldane, Bank of England

Bank of England executive director of financial stability Andrew Haldane’s recent comments on trigger mechanisms for contingent convertible (CoCo) notes have been met with a chilly response from banks.

In late March, Haldane argued for a reconfiguration of banks’ capital structures, that "would bake-in the benefits of simplicity, robustness and timeliness". Integral to this, he suggests, is the requirement to issue CoCos alongside equity. These CoCo instruments should have triggers based on market-based measures of solvency and the triggers should be graduated, stretching up the bank’s capital structure with the CoCo converting to equity on triggering.

This would mark a radical departure for the market. Those banks that have issued contingent convertibles so far (Lloyds, Rabobank, Credit Suisse and Bank of Cyprus) have set trigger levels based on the banks’ Basle III common equity tier 1 (CET1) ratios. The earlier Lloyds and Rabobank deals set single triggers at 5% and 7% respectively, while the "Swiss finish" encapsulates both a high-strike trigger and a low-strike trigger.