Abstract

Contingent capital (cocos) instruments are debt securities that automatically co vert into equity if a predetermined trigger (given in terms of equity price or capit ratio) is breached. The dynamic incentive feature of a properly designed continge capital would encourage effective risk governance by banks, on the ground that co version of the debt security into equity would bring about the dilution of the exis ing shareholders (through a proper level of the conversion ratio). This paper argue that the difficulties that lie behind an effective calibration of the main cocos' feature stem from the need to strike the right trade-off amongst the different stakeholder (shareholders, investors, supervisors). Moreover, recurring to automatic mechanis is unwise from a supervisory standpoint, given the difficulty to foresee the chara teristics of a future financial crisis, whereas a certain degree of discretion should b exerted.