CoCo Bonds: Are They Debt or Equity? Do They Help Financial Stability?

Professor Zhenyu Wang (Kelley School of Business at Indiana University) presented the fourteenth lecture in the Indiana University - ECGI Online Series on the topic "CoCo Bonds: Are They Debt or Equity? Do They Help Financial Stability?". 

In a deal brokered by the Swiss government, UBS agreed to buy Credit Suisse for $3.2 billion, but the $17.3 billion of CoCo bonds (also called AT1 bonds) issued by Credit Suisse are wiped out. Bond investors were surprised that CoCo bond holders receive nothing while common equity holders receive billions in the deal. It appears to violate the priority of debt over equity. The wipe-out of Credit Suisse CoCo bonds threatens the CoCo bonds market, which has about $250 billion outstanding issued by banks around the world, except that none are issued by U.S. banks. Is a CoCo bond really debt or equity? Is it legal for regulators to wipe out CoCo bonds to make equity worth more? Why do banks issue CoCo bonds? Do CoCo bonds help or hurt the stability of banks? Why didn’t U.S. banks issue CoCo bonds? These are just a few of the wide range of questions to be discussed about CoCo bonds.

Zhenyu Wang has been a Professor of Finance at the Kelley School of Business at Indiana University since 2012. He also holds the Edward E. Edwards Professorship. Before coming to Indiana, Professor Wang was a vice president of the Federal Reserve Bank of New York, where he served as the head of the Financial Intermediation Function. He directly participated and contributed crucially in designing the Term Auction Facility, reforming the collateral management system of Discount Window, executing the aid to JPMorgan's acquisition of Bear Stearns, setting up Maiden Line II and III portfolios of AIG’s securities, setting the financial terms of TARP, and formulating post-crisis bank capital regulations. Professor Wang has published research on equity, fixed income, derivative securities, asset management, bank regulation, and financial econometrics. His research on asset pricing produced the widely used Jagannathan-Wang model. His research on contingent capital was influential in U.S. and European bank capital regulations and in the Basel III Accord.

The public lecture series was organised by Institute for Corporate Governance (ICG) in partnership with the Ostrom Workshop at Indiana University and ECGI.