The Basle Committee’s decision in June to disallow the use of contingent convertible (CoCo) bonds to meet capital buffer requirements for systemically important financial institutions (SIFIs) came as a nasty surprise to many banks that had invested time and resources in the new instruments.

None had invested more of either than Credit Suisse, which sold its breakthrough $2 billion buffer capital note transaction in February. But the Swiss bank stands by its commitment to the asset class, believing that there is still sufficient market pressure for it to grow.

"In an ideal world, it would be nice if somebody else was always willing to take the lead in developing new products," Wilson Ervin, senior adviser to chief executive Brady Dougan at Credit Suisse in New York, tells Euromoney. "But in this case – given the framework in Switzerland – we thought it important for us to take the lead and show that CoCos can be issued in size and at a reasonable cost. I think our deals proved that."

Leading player

Wilson Ervin, Credit Suisse

Credit Suisse has been one of the leading players in the development of the CoCo market and the Basle Committee’s position, which was approved by Financial Stability Board chairman Mario Draghi on July 18, will have come as a blow. "The most optimistic way to describe the impact of the decision on capital rules is 'mixed'," Ervin says. "Losing CoCos in the SIFI buffer is a disappointment. We thought their inclusion was a good idea and would have been useful for developing the market – but that specific impetus has waned."

He argues that the regulators have missed an opportunity to support innovation in the market. "Regulators are naturally inclined to be cautious, but there is not a lot to be said for the status quo," he says.

"We don’t have a lot of positive examples from the last crisis of things that have worked well. So we're going to need some new tools – certainly carefully crafted and well thought out, but also new."

Market shrinks

Following the June announcement, estimates for the potential size of the CoCo market have withered from around $1 trillion to as little as $200 million to $250 million. But Credit Suisse is optimistic that there is sufficient market pressure for the instruments to be used, for example as additional tier 1 capital.

"The debate might be shifting a bit from regulatory push to investor pull'," Ervin explains. "With the resolution announcement, we would expect increasing pressure from senior investors who want to get a larger capital cushion between them and harm’s way."

So predictions of the early death of the CoCo market could well turn out to be premature. And Credit Suisse, for one, is certainly sticking with the instruments for now.

"It is too early to say that we are going to take a radically different tack on CoCos," Ervin says. "There are strong forces at play in favour of higher bank capital, and CoCos are a useful tool that can meet that need. So we think these instruments could still have an important role to play."

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Contingent convertibles: Credit Suisse deal marks breakthrough