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  • P-ISSN 2586-2995
  • E-ISSN 2586-4130
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KDI Journal of Economic Policy. Vol. 41, No. 4, November 2019, pp. 1-44

https://doi.org/10.23895/kdijep.2019.41.4.1

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Is Bail-in Debt Bail-inable?

SUNJOO HWANG

Author & Article History

Manuscript received 19 August 2019; revision received 03 September 2019; accepted 08 November 2019.

Abstract

The contingent convertible bond (or CoCo) is designed as a bail-in tool, which is written down or converted to equity if the issuing bank is seriously troubled and thus its trigger is activated. The trigger could either be rule-based or discretion-based. I show theoretically that the bail-in is less implementable and that the associated bail-in risk is lower if the trigger is discretion-based, as governments face greater political pressure from the act of letting creditors take losses. The political pressure is greater because governments have the sole authority to activate the trigger and hence can be accused of having 'blood on their hands'. Furthermore, the pressures could be augmented by investors’ self-fulfilling expectations with regard to government bailouts. I support this theoretic prediction with empirical evidence showing that the bailin risk premiums on CoCos with discretion-based triggers are on average 1.13 to 2.91%p lower than CoCos with rule-based triggers.

Keywords

Contingent Convertible Bonds, Bail-ins, Discretion-based Triggers, Rule-based Triggers

JEL Code

G01, G12, G21, G28

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