Contingent Convertible Bonds (CoCo bonds) and their market development in Albania

Abstract

Convertible Contingent Bonds are important financial instruments for the stability of the banking and financial system in general. The role of innovative financial instruments is crucial to help address the challenges posed by these critical situations. One of these reintroduced instruments with ambitions to enhance the stability of the banking sector is the “Contingent Convertible Bond,” abbreviated as “CoCo.” This paper aims to explore the impact of the use of Convertible Contingent Bonds (CoCo) in financial crisis situations and their effect on avoiding the domino effect of a bank failure. Starting from the critical factor of the stability of the financial system, this analysis aims to shed light on the potential of these innovative instruments in improving the stability of the banking sector as well as the need for their modeling in the Albanian banking sector, considering the lack of treatment particular of these instruments in the current legislation. The analysis of the possibilities for their application in the Albanian banking system shows that, if implemented successfully, they can increase the regulatory capital of banks, strengthen financial stability and reduce the risk of government intervention in cases of crises. In conclusion, the use of CoCo bonds in Albania should be accompanied by the improvement of legislation and the encouragement of financial institutions’ investments in these instruments, to create a safer and more stable environment in the country’s banking sector. Keywords: Contingent Convertible Bonds (CoCo bonds), Basel III, resolution, financial crisis.