A Bundesbank paper published on Tuesday finds that contingent capital, or cocos, reduces the deadweight loss associated with bankruptcy and suggests it can be introduced in firms' long-term financing structure without a mandate.

George von Furstenberg, the paper's author, uses a stochastic process to examine whether the introduction of cocos can reduce the deadweight losses of bankruptcy at a well-capitalised bank were it to violate its minimum capital maintenance requirement.

The results show