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Question 1 (30 points) Contingent convertible capital instruments (CoCos) are hybrid capital securities issued by banks that absorb losses when the capital of the issuing bank falls below a certain level. Then, debt is reduced and bank capitalisation gets a boost. From a bank perspective, CoCos have the capacity to absorb losses, and in turn the potential to satisfy regulatory capital requirements and, eventually, maintain financial stability On the other hand, from a retail investor perspective, figuring out when a CoCo bond is at risk of being converted to equity effectively cradicating the value of the bond can be tricky. Dr. Mller, a customer of the retail bank LP Morgan located in Munich, Germany, has been offered a tranche of CoCos bond, with fixed coupons of 6 per cent. Lured by the high returns Dr. Muller decided to buy LP Morgan's CoCos. One year later, LP Morgan ran into troubles finding itself in need of capital to keep the banking license, thus activating the mechanism as to convert CoCo bonds into capital. Dr. Muller incurred a great loss and he had a reasonable suspicion that he was not properly informed of the risky nature of subscribing CoCos. In his opinion, the management of the bank has not taken customer of financial services being offered (as provided for by the EU Directive MiFID II), and decides to come to you for some advice. Note that LP Morgan is to be considered a significant institution as it amounts to one of the biggest banks and the total value of its assets exceeds 30 billion. appropriate measures and procedures to properly inform a) Which authority is responsible for the oversight of the CoCos issued by LP Morgan Bank? Explain your answer, also referring to relevant legislation (11 points) b) Now, assume that Mller's brother has been lured into CoCos, too. He also wants to hire you as consultant. He lives in Denmark and he has been offered CoCos by a Danish insurance broker distributing financial services. Would this make any difference? (5 points) c) CoCos' emergence and issuance is the result of free market dynamics. At the very beginning regulators and supervisors did not consider it necessary to intervene and regulate CoCos. Why? What market failures might have convinced policy- and law-makers to eventually intervene and regulate them? (7 points) d) Do you expect the Danish and German investor protection regimes to be different from each other? Discuss whether and to what extent the EBA (European Banking Authority) is entitled to play a role in converging and harmonising the rules contained in MiFID IL. (7 points) Question 1 (30 points) Contingent convertible capital instruments (CoCos) are hybrid capital securities issued by banks that absorb losses when the capital of the issuing bank falls below a certain level. Then, debt is reduced and bank capitalisation gets a boost. From a bank perspective, CoCos have the capacity to absorb losses, and in turn the potential to satisfy regulatory capital requirements and, eventually, maintain financial stability On the other hand, from a retail investor perspective, figuring out when a CoCo bond is at risk of being converted to equity effectively cradicating the value of the bond can be tricky. Dr. Mller, a customer of the retail bank LP Morgan located in Munich, Germany, has been offered a tranche of CoCos bond, with fixed coupons of 6 per cent. Lured by the high returns Dr. Muller decided to buy LP Morgan's CoCos. One year later, LP Morgan ran into troubles finding itself in need of capital to keep the banking license, thus activating the mechanism as to convert CoCo bonds into capital. Dr. Muller incurred a great loss and he had a reasonable suspicion that he was not properly informed of the risky nature of subscribing CoCos. In his opinion, the management of the bank has not taken customer of financial services being offered (as provided for by the EU Directive MiFID II), and decides to come to you for some advice. Note that LP Morgan is to be considered a significant institution as it amounts to one of the biggest banks and the total value of its assets exceeds 30 billion. appropriate measures and procedures to properly inform a) Which authority is responsible for the oversight of the CoCos issued by LP Morgan Bank? Explain your answer, also referring to relevant legislation (11 points) b) Now, assume that Mller's brother has been lured into CoCos, too. He also wants to hire you as consultant. He lives in Denmark and he has been offered CoCos by a Danish insurance broker distributing financial services. Would this make any difference? (5 points) c) CoCos' emergence and issuance is the result of free market dynamics. At the very beginning regulators and supervisors did not consider it necessary to intervene and regulate CoCos. Why? What market failures might have convinced policy- and law-makers to eventually intervene and regulate them? (7 points) d) Do you expect the Danish and German investor protection regimes to be different from each other? Discuss whether and to what extent the EBA (European Banking Authority) is entitled to play a role in converging and harmonising the rules contained in MiFID IL. (7 points)

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