“U.S. Taxation of Contingent Convertible Bonds,” Derivatives & Financial Instruments, IBFD, Vol. 13, No. 3, May/June 2011 2011-5 IBFD CoCos
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) authorizes the Federal Reserve to require bank and non-financial holding companies “to maintain a minimum amount of contingent capital that is
convertible to equity in times of financial stress”. The Basel Committee and the related Financial Stability Board also have reviewed additional measures that might include capital surcharges, contingent capital, and “bail-in” debt. On 13 January 2011, the Basel Committee issued a
notice setting out requirements in this area for banking institutions to follow. In the notice, it directed that “all non-common Tier 1 and Tier 2 instruments” issued by any “internationally active bank” must provide that, at the option of the local banking authority, the instrument will be written off or converted into common equity in the event the local banking authority determines the bank would otherwise become “non-viable”.