CoCos (Contingent Convertible Bonds)

Contingent Convertible Bonds (CoCos) are a special type of debt issued by banks that automatically convert into equity (shares) or absorb losses when the bank’s financial health deteriorates beyond a certain point. They serve as a buffer to help banks maintain stability during financial stress. CoCos offer higher interest rates to investors due to their risk of conversion or loss, which is triggered by specific financial conditions. Essentially, they provide a safety net for the bank, reducing the risk of failure and potential taxpayer bailouts, while offering investors a way to earn higher returns in exchange for increased risk.