Monday, April 8, 2013

Did Cyprus uninsured depositor bail-in kill market for bank contingent convertible debt?

At a minimum, one of the unintended consequences of the uninsured depositor bail-in in Cyprus should have been a reminder to all potential investors just how dangerous bank contingent convertible securities are.

In the absence of banks providing ultra transparency, CoCos are nothing more than a blind gamble on the solvency of the issuing bank or that the host government will bail an insolvent bank out.

After all, if uninsured depositors are going to take a hit, it is clear that holders of CoCos, who are lower down in the bank's capital structure, should be wiped out.

Without ongoing access to a bank's current asset, liability and off-balance sheet exposure details, there is no way for an investor to assess the solvency of a bank.

Trust in the results of stress tests?

No.  There have been numerous banks that passed the solvency focused stress tests that were subsequently nationalized.  Dexia for example.

Trust in the bank's ratings provided by the rating firms?

No.  Recall that the rating firms couldn't accurately rate structured finance securities either.

Trust in the bank's book capital level?

No.  Sheila Bair claims it is deceptive and she would know given that the financial regulators have been manipulating bank capital to make the banks look stronger since the beginning of the financial crisis.

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