2. CoCo Bonds and Bail-in Mechanism

In addition to automatic trigger mechanism based on regulatory capital ratio level, European Union’s (EU) competent resolution authorities are granted discretionary power to start write-down or conversion of contingent convertibles (CoCos) and determine its exact scope on reaching the point of non-viability (PONV) that marks an institution is ‘failing or likely to fail’. These two trigger mechanisms are effective parallelly and their interrelation is subject of detailed study in this chapter. The PONV loss-absorption mechanism that came with the new EU’s resolution regime in 2014 is a determinant for the whole ‘bail-in’ bonds class. In this chapter, we examine the subordinated bail-in bonds in the form of Tier 2 and new class of non-preferred senior instruments. The general concept of bail-in bonds led to the introduction of total loss-absorption capacity (TLAC) for globally systemically important banks and minimum requirement for own funds and eligible liabilities (MREL) for all EU banks in 2014, which is referred to in this chapter.