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Exterior of the Royal Bank Plaza towers at the corner of Bay St. and Wellington St. West in Toronto on April 17 2014.
Exterior of the Royal Bank Plaza towers at the corner of Bay St. and Wellington St. West in Toronto on April 17 2014.
(FRED LUM/THE GLOBE AND MAIL)

Could ‘CoCos’ start a frenzy of short-selling in a crisis?

Last week, Royal Bank of Canada issued $1-billion worth of “non-viable contingent capital” bonds, known colloquially as NVCC bonds or, most enjoyably, as CoCos. Ideally, CoCos encourage investors to monitor banks for excess leverage. However, as new research by Jingya Li and Mark Reesor of the University of Western Ontario and Adam Metzler of Wilfrid Laurier University shows, if the conditions are right, CoCos may provide an incentive to cheat.