Law Commons^™

Cocos Can Drive Markets Cuckoo, Hilary Allen

Articles in Law Reviews & Other Academic Journals

Bank-issued contingent-convertible capital instruments (known colloquially as "cocos ") are assumed to be a less costly substitute for common equity that will improve the stability of banks in a crisis situation. However, cocos are new and untested instruments. In a future financial crisis they are likely to incentivize behaviors and trading strategies (notably panic selling short selling, and the use of credit default swaps) that have the potential to harm confidence in banks. Without confidence, banks will have difficulty funding themselves and the likely consequences of bank difficulties (credit crunches and possible bailouts) will be felt by society at large. …