Сontingent capital instruments are supposed to provide a buffer for financial distress. Discuss how these instruments work.
Contingent Capital Instruments (“CoCo”) have been issued by most of the Financial Institutions since January 2011 in order to address more stringent capital requirement initiated by the EU’s Capital Requirements Directive (CRD). Contingent Capital instruments are “hybrid capital securities that absorb losses when the capital of the issuing bank falls below a certain level”. This hybrid product has been created in response to the stringent capital requirement by Banks in order to enable them to fund themselves to comply with Regulatory ratio.