Global issuance volume of contingent capital securities (CoCos) for 2015 fell sharply by 42% from 2014, but remained dominated by Asian — particularly Chinese — and European banks, Moody’s Investors Service announced on Wednesday.
CoCos are debt instruments that convert into equity in times of balance sheet stress.
The primary reason for the decline to $101 billion from $175 billion, according to a Moody’s report, was lower issuance by Chinese banks, “driven by persistently weak market conditions and a slower pace of balance-sheet growth that may have reduced their short-term capital requirements.”
Still, Asian banks accounted for almost half (48%) of CoCo issuance in 2015, and European banks generated the other major chunk (40%). This reflects the progress that regulators in those regions have made in implementing the new Basel III capital requirements, the Moody’s report says.
In Asia, banks have issued CoCos to “fund rapid balance sheet growth and to meet capital requirements in jurisdictions that have made progress in early adoption of the Basel III capital framework,” the Moody’s report says. Whereas in Europe, they’ve used them to bolster their capital positions in preparation for the regulators’ stress tests.
The credit rating agency indicates that it expects CoCo issuance to be flat in 2016, and to continue to be concentrated among a group of large banks. “Although the base of CoCo issuers has widened in recent months, Moody’s expects this concentration among the top 10 issuers to persist as the largest globally active institutions have to meet significantly higher capital requirements and buffers under Basel III and respective national and regional regulatory frameworks,” the Moody’s report says.