01:34:11 EDT Fri 29 Mar 2024
Enter Symbol
or Name
USA
CA



Royal Bank of Canada
Symbol RY
Shares Issued 1,441,460,304
Close 2014-07-23 C$ 79.26
Market Cap C$ 114,250,143,695
Recent Sedar Documents

Globe says RBC's CoCos could lead to "death spiral"

2014-07-24 08:55 ET - In the News

The Globe and Mail reports in its Thursday edition Royal Bank of Canada has issued $1-billion with of "non-viable contingent capital" bonds, known as CoCos. The Globe's Adrian Myers writes CoCos encourage investors to monitor banks for excess leverage, but as new research shows, CoCos may also provide an incentive to cheat. CoCos are debt that converts to equity when a bank gets into trouble and, therefore, can be counted as Tier 1 capital. With a "triggering event," whereby the bank it is no longer viable, CoCos will convert to equity. CoCos are often called "bail-in" debt; bondholders recapitalize troubled banks so governments do not have to. Research shows that certain CoCo structures offer investors very different incentives. Where the conversion price of the CoCo is based on the market price of the institution's common stock and the CoCo uses an accounting trigger, investors have an incentive to short the underlying shares in order to depress the share price prior to conversion. That means CoCo investors might drive down the price of an institution's stock as conversion approaches, making an already precarious time for the bank even more dangerous. At worst, this could lead to a death spiral.

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