In this brave new banking world of impenetrable bureaucratic morass designed to keep us all from ourselves (slogan: don’t panic, there’s a lot of new math), there are new acronyms for just about anything. To regulators, some groups of letters mean a lot more than they might for banks, while investors, loosely defined, focus on still others. One such term found itself in a perfect storm of the all-too-familiar unintended consequences of regulations.

There is, of course, a fatal conceit at the heart of all of this – that regulations alone can design a foolproof system. This is not to say that mistakes won’t be made or losses tallied, only that with each new layer of complexity the hubris unduly aligns the belief that dictation alone can prevent individual circumstances from ever again impacting systemic function. As if that attempt wasn’t risible enough, the way in which regulators go about accomplishing this utopian design is by using the last crisis as the template.

AT1 bonds are a relatively easy concept to understand from both bank and investor perspectives, but that doesn’t mean everything is straightforward. Governments wanted banks to give them more assurance that if there ever was a “next one” that bank investors would be specifically prepared to act as a capital buffer before “forcing” (TBTF doctrine survives everything) sovereign action and taxpayer loss. The fuzzy but officially embraced concept of “ring fencing” starts with any bank’s capital structure. A contingent capital security seemed the perfect answer; functionally a bond that pays slightly better than peer bank debt because in times of stress the bank can suspend irrevocably the interest payment if not convert it into common stock.

These contingent convertible bonds, colloquially referred to as CoCo’s or just cocos, were initially met with skepticism before orthodox central banking thrust enormous “reach for yield” in their direction. For investors, it seemed all relatively easy; that banks would only suspend interest if their capital ratios fell below a certain amount. Nobody cared much about the “certain amount” in the world of QE3 (then 4) for dollars and Mario Draghi’s promise in euros. Issuance soared, with Dealogic reporting that well more than €100 billion (actual estimates vary widely) in cocos were sold since 2013, including ~€45 billion in both 2014 and 2015. Those totals do not count cocos sold in dollar-denomination.

Even as the world shifted under the “rising dollar”, there was little actual alarm. Issuance slowed, but as Moody’s wrote in May 2015 there was every (mainstream) reason to fully expect the comprehensive outlook contained within Yellen’s “transitory”:

Moody’s Investors Service says that the global issuance of contingent capital instruments (CoCos) has slowed, but will likely recover in the second half of 2015, as banks strive to meet their capital requirements.

“Banks issued $47.5 billion of CoCos between January and mid-May 2015, down from $53 billion a year ago. Although annualized the amount would total about $127 billion for 2015, or well below $175 billion in 2014, we expect a pick-up in the second half as banks fulfill their regulatory capital requirements,” says Barbara Havlicek, a Moody’s Senior Vice President.

It’s an amazing repetition, as this Moody’s statement about coco issuance could have just as easily passed as a similar statement about manufacturing PMI’s. Weakness was temporary since central bankers declared it was; because of this logical fallacy (appeal to authority, especially when that authority has nothing to offer but credentials) these expectations were ripe for unmasking. It would take something significant for it, however, as this overriding theme was terrifically entrenched. As late as September 2015, echoing how “transitory” was still thought to apply even after the events of August, Markit Financial Information Services was staunchly defending both financial services credit and cocos specifically.

Financials debt has proven to be one of the areas of relative strength in the current market with the Markit iBoxx $ Banks index and broader iBoxx $ Financials index both delivering positive total returns in the year to the end of August. This relative performance also hold true on the other side of the Atlantic with the iBoxx € Financials and iBoxx € Bank indices outperforming the wider universe of Euro denominated investment grade bonds by 40bps and 50bps, respectively, over the same time period.

The outperformance was largely driven by falling risk perceptions as the index option adjusted spread of both the Euro and USD bank indices have performed better than the wider bond market. Falling risk perceptions have been most felt on the subordinated segments of bank balance sheets with the Markit iBoxx € Banks Subordinated and iBoxx $ Eurodollar Banks Subordinated indices outperforming their more senior peers since the start of the year.