Regional Financial Integration in East Asia against the Backdrop of Recent European Experiences

This article discusses recent trends in regional financial integration in East Asia and current efforts of the Association of Southeast Asian Nations (ASEAN) member countries to foster regional financial integration against the backdrop of three decades of experience with financial integration in Europe. It reviews the two major crisis episodes of the recent European financial history to illustrate the risks associated with comprehensive capital account liberalisation and financial integration without commensurate supervisory structures. The article highlights the importance of targeted macroprudential policies and the development of an adequate region-wide regulatory and supervisory framework to reduce the risks associated with regional – and hence international – financial integration

Convertible Bonds and Bank Risk-Taking

We study how contingent capital that converts in equity ahead of default affects bankrisk-shifting. Going concern conversion restores equity value in highly levered states,thus reducing heightened risk incentives. In contrast, conversion at default for traditionalbail-inable debt has no effect on endogenous risk. The main beneficial effect comes from reduced leverage at conversion. In contrast to traditional convertible debt, equity dilution under going concern conversion has the opposite effect. The negative effect of dilution is tempered by any value transfer at conversion. We find that CoCo capital may be less risky than bail-inable debt when lower priority is compensated by lower endogenous risk, which is beneficial as a lower bond yield improves incentives. The risk reduction effect of CoCo debt depends critically on the informativeness of the trigger, but is always inferior to pure equity

CoCo issuance and bank fragility

The promise of contingent convertible capital securities (CoCos) as a ‘bail-in’ so-lution has been the subject of considerable theoretical analysis and debate, butlittle is known about their effects in practice. We undertake the first comprehen-sive empirical analysis of bank CoCo issues, a market segment that comprises over 730 instruments totaling $521billion. Four main findings emerge: 1) thepropensity to issue a CoCo is higher for larger and better-capitalized banks; 2)CoCo issues result in a statistically significant decline in issuers’ CDS spread,indicating that they generate risk-reduction benefits and lower costs of debt (thisis especially true for CoCos that convert into equity, that have mechanical trig-gers, and that are classified as Additional Tier 1 instruments); 3) CoCos withonly discretionary triggers do not have a significant impact on CDS spreads; and 4) CoCo issues have no statistically significant impact on stock prices, exceptfor principal write-down CoCos with a high trigger level, which have a positive effect