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Opinion

AT1: When they go low, you go high

What to do when questions are being asked about the effectiveness of low-trigger CoCos? Issue higher trigger ones, of course.

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It has not been a good few weeks for the CoCo bond. In late April, The Economist newspaper declared that, nine years after the first bonds were issued, they have not fulfilled their promise.

“The idea that CoCos would help struggling banks recapitalize seems far-fetched,” they say, describing them as a niche investment. “This is quite a comedown for an asset class once touted as an elegant, almost automatic way to return struggling banks to health.”

That might be a little unfair, but in its monthly report for March 2018, the Bundesbank revealed itself as not the biggest fan of the CoCo bond either. One fairly fundamental problem, it states, is that the 5.125% of RWA conversion trigger that is in place for more than 40% of European AT1 bonds outstanding is actually lower than the point at which the European Central Bank would consider the bank a gone concern.

The German central bank has, therefore, recommended an exploration into how far this threshold should be raised in order for CoCo bonds to have the effect that the regulators actually intended.

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It seems a little late for that.


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