In this workout, we look at another example of a CoCo, a continued convertible bond. Cocos, of course, are there to recapitalize the bank in times of distress, right? So bank B balance sheet extract is shown below. Calculate the amount of common equity tier one capital, excluding CoCos. While we would always exclude the CoCos from common equity tier one, so the common stock of course counts towards the common equity tier one capital. So as retained earnings, there is no goodwill here. But if there was some goodwill, we would remove that. And therefore our common equity tier one capital here is 16,700.

Now, if the CoCo trigger is a minimum common equity tier one of 1500, what will the new common equity tier one be post a partial CoCo commercial to meet but not exceed the minimum common equity tier one should the trigger occur due to a loss of 2000 in the year. So important word here is the partial CoCo conversion. But let's have a look first of what happens to our common equity tier one. Well, our retained earnings are going to take a hit because the company has just lost 2000 in the year.

So our retained earnings will go from 15,500 and it will drop by 2000. So our new retained earnings is 13 and a half. So our common equity tier one in this example now will of course be the common stock plus the retained earnings minus the goodwill. So the common equity tier one capital now is 14,700. So clearly we are seeing a CoCo trigger event here because the trigger was a minimum common equity tier one capital of 15,000 and we're clearly below that now. So it means the CoCo's have been triggered but we are looking at a partial CoCo conversion here. So let's have a look at what happened after we convert those CoCo's.

So the common stock will be the 1200 we originally had plus the shortfall we have in our common equity tier one capital. We should have 15,000, but we only have 14,700.

So the common stock will increase by 300 because that's what we need to come back to the appropriate common equity tier one capital levels. So the CoCo will not be fully converted but partially converted, and only 300 of the CoCo's will be converted. So the 400 minus 15,000 plus 14,700 gets us a new CoCo level here of 100. So 300 out of the 400 CoCo's have been converted into common stock. So let's have a look now at the common equity tier one capital. It will be the common stock plus our retained earnings. Mine is the goodwill and it's now 15,000. So the company made a loss. Common equity tier one capital dropped to 14,700 which was under the trigger level. The CoCo was allowed for partial conversion so only the proportion of CoCo's required to meet the CET1 capital requirement of 15,000 was required. So 300 of the 400 CoCos was converted getting our common equity tier one capital back to 15,000.