Let's take a look at an example with a CoCo. CoCos are of course, continuum convertible bonds and they are typically issued by banks. CoCos are there, of course to recapitalize the bank in times of distress and CoCos will have these potential trigger events. So bank A's balance sheet extract is shown below. Calculate the amount of common equity tier one capital, excluding the CoCo's. Well the common equity tier one capital will be the common stock plus the retained earnings minus the goodwill equals 400. In this case. Let's move down. If the CoCo trigger is a minimum common equity tier one capital of 300, what will the new common equity tier one capital be post a full CoCo conversion should the trigger occur following a loss of 150? Right, so the bank has experienced a loss of 150. Now, that loss will not affect the common stock. The common stock will still be 100. However, of course, the retained earnings will drop. So the new retained earnings will be the old retained earnings minus a loss of 150. So the new retained earnings is 250 Goodwill's still a hundred, and CoCo is still 300 here. So what is the common equity tier one capital now? It's gonna be the common stock plus retained earnings minus the goodwill, and is now 250.

The trigger event here was a minimum common equity tier one capital of 300. So clearly the trigger event for this CoCo has occurred. So this CoCo will now convert. And it stated in the question here that this will be a full conversion. So let's look at the balance sheet after conversion.

So the common stock was a hundred, but now the entire CoCo all 300 of it has converted into equity. So now the common stock is 400. The retained earning is still 250. They haven't made another loss. They just made that 150 loss. So the retained earnings still 250 and the goodwill is still 100. So let's calculate the common equity tier one capital now. It's gonna be the common stock plus the retained earnings minus the goodwill 550. So following this trigger event following this loss that led to a trigger event the CoCo was converted into common stock and pushed the common equity tier one capital from 250 to 550 post conversion.