Self-Insurance with Cocos Compared to Common Equity

Admati and Hellwig (2013) have recently published a much noted plea for higher CET1 requirements, pure and simple, and lambasted at every turn “the bankers” who chafe at raising them. My basic view is that the combination of capital and leverage requirements currently supposed to be phased in by 2019 (see Table 1) is about adequate. Their de facto implementation is already being moved up as banks compete in wanting to show that they already meet, or more than meet, the Basel III capital standards ‘fully loaded,’ i.e., at the final levels set for January 2019. The most that Admati and Hellwig (2013, p. 188) are willing to grant about cocos is that “they may be better at protecting the safety of the bank than simple debt.” But they see “no valid reason for non-equity alternatives to be considered instead of equity when using equity would be simpler and more effective in achieving the goals of a stable and healthy financial system.” They have not looked very hard to see any such reason; hence there is a challenge to demonstrate that cocos, which get just 2 out of almost 400 pages in their book, have some valuable features that distinguish them from common stock and make them suitable to be both part of and a supplement to the increased capital and leverage requirements ahead…