[News Terms] Bank Sector's 'Coco Bond' Call Option
US, Germany, Switzerland... Financial Instability Spreads
Preemptive Measures to Curb Investor Anxiety
Following Shinhan Financial Group, Woori Bank will exercise the call option on its CoCo bonds, which are due for early redemption next month. This preemptive measure comes amid growing investor anxiety triggered by the full write-down of CoCo bonds issued by Swiss bank Credit Suisse (CS).
CoCo bonds are a type of capital securities issued with conditions that, in times of distress, the principal investment is forcibly converted into shares or written off. They are recognized as capital in accounting and are thus called contingent capital securities. However, they carry the characteristics of debt that must be repaid upon maturity. The Swiss financial authorities' decision to fully write down $17 billion (22 trillion KRW) worth of contingent capital securities during the CS sale process has spread financial instability worldwide.
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According to financial sources, Woori Bank has decided to exercise the call option on 500 billion KRW worth of hybrid capital securities starting from the 25th of next month. These hybrid capital securities were issued by Woori Bank in April 2013. Prior to this, on the 27th, Shinhan Financial announced it would exercise the call option for early redemption on 135 billion KRW worth of Korean won-denominated hybrid capital securities maturing in April. Subsequently, KB Financial Group and Hana Financial Group also stated plans to proceed with early redemption of their hybrid capital securities as scheduled upon call option maturity.
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The banks’ proactive disclosure of their hybrid capital securities call option exercise plans is related to global financial instability. It is interpreted as an effort to prevent the ripple effects of the 'bankdemic'?stemming from the bankruptcy of the U.S. Silicon Valley Bank (SVB) and crisis rumors surrounding Germany’s Deutsche Bank?from spreading to the domestic banking sector. The term 'bankdemic' is a portmanteau of 'bank' and 'pandemic,' describing a banking crisis that spreads rapidly like an infectious disease.
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