Does the ECB want to end CoCos?

CoCos: “If we want things to stay as they are, things will have to change.” (The Leopard)

The ECB published in March a response to the Call for advice by the European Commission on the macroprudential framework for European banks (link here), which makes several proposals that could affect the Additional Tier 1 (AT1) CoCo segment in Europe… or will it really?

First, let’s provide some context regarding this text and more specifically how it could eventually be translated into law. The Commission’s review is broad and encompasses several topics, among which the way AT1 CoCos are being used by banks. The ECB acts as an advisor on these matters, and though other regulatory bodies will also make recommendations (EBA, ESRB), we cannot deny that the ECB has a strong say in these macroprudential adjustments. The Commission should publish its review by end-June 2022. Possible legislative proposals by end-December (or later) would be followed by the Parliament’s and Council’s versions, before rule changes are finalized, potentially in 2024 or 2025. It is important to stress that (i) not all changes proposed here will be implemented, as they will be most certainly watered down or suppressed by the miscellaneous stakeholders drafting up and voting the law (including bank lobbies), (ii) the timing for any change is highly uncertain, but we do not expect anything before at least 2024… for an application at least one year later. Our view is that most of what is proposed here will be implemented rationally and slowly to avoid any market disruption, as is often the case with regulatory proposals.