Contingent capital: The case of COERCs

George Pennacchi, Theo Vermaelen, Christian C.P. Wolff

Research output: Contribution to journalReview articlepeer-review


This paper introduces and analyzes a new form of contingent convertible: a call option enhanced reverse convertible (COERC). If an issuing bank's market value of capital breaches a trigger, COERCs convert to many new equity shares that would heavily dilute existing shareholders, except that shareholders have the option to purchase these shares at the bond's par value. COERCs have low risk: They are almost always fully repaid in cash. Yet, they reduce government bailouts by replenishing a bank's capital. COERCs' design also avoids problems with market-value triggers, such as manipulation or panic, while reducing moral hazard and debt overhang.

Original languageEnglish (US)
Pages (from-to)541-574
Number of pages34
JournalJournal of Financial and Quantitative Analysis
Issue number3
StatePublished - Feb 26 2014

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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