CoCo Consternation And Systemic ProcyclicalityVW Staff
Karen Shaw Petrou's memorandum to Federal Financial Analytics clients on CoCo consternation and systemic procyclicality.
TO: Federal Financial Analytics Clients
FROM: Karen Shaw Petrou
DATE: February 12, 2016
As bank stocks stumble and CDS spreads head into the abyss, the role of contingent convertible (CoCo) debt instruments warrants careful consideration. Their cataclysmic, downward price spiral is a reminder that market discipline is a ruthless task-master, especially when financial problems combine with policy incoherence. Without certainty about who loses what when, CoCos now and perhaps TLAC to come can turn into perfect procyclical storms, as I suggested to Bloomberg . . .
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