The OFR posted a research paper today, entitled, “Europe’s CoCos Provide a Lesson on Uncertainty.” European banks issue contingent convertible bonds. These bonds can force investors to absorb losses when a bank is under stress. In the working paper, the authors find that heightened uncertainty about discretion by banks about when to make payments to investors and by regulators about when to trigger a loss absorption mechanism worsened price declines in a stressed market.
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