Contingent convertible (or CoCo) bonds reduce banks' incentives to engage in asset risk-taking, argues a working paper published this month by the Netherlands Bank (DNB).

In Convertible bonds and bank risk-taking, Natalya Martynova and Enrico Perotti argue that CoCo bonds have a risk prevention as well as a risk-shifting effect. They say CoCo bonds are usually chosen when equity is unavailable and examine how the bonds affect banks' incentives in highly-leveraged states.

The authors focus on the