Convertible bonds and bank risk-taking

Arbeitspapier

We study how contingent capital affects banks' risk choices. When triggered in highly levered states, going-concern conversion reduces risk-taking incentives, unlike conversion at default by traditional bail-inable debt. Interestingly, contingent capital (CoCo) may be less risky than bail-inable debt as its lower priority is compensated by a lower induced risk. The main beneficial effect on risk incentives comes from reduced leverage upon conversion, while any equity dilution has the opposite effect. This is in contrast to traditional convertible debt, since CoCo bondholders have a short option position. As a result, principal write-down CoCo debt is most desirable for risk preventive pur- poses, although the effect may be tempered by a higher yield. The risk reduction effect of CoCo debt depends critically on the informativeness of the trigger. As it should ensure deleveraging in all states with high risk incentives, it is always inferior to pure equity.

Angaben zum Objekt

• ISBN: 978-3-95729-475-3
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Bundesbank Discussion Paper ; No. 24/2018

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Contingent Pricing; Futures Pricing; option pricing ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Thema: Banks ; Contingent Capital ; Risk-shifting ; Financial Leverage

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Martynova, Natalya ; Perotti, Enrico C.
• Ereignis: Veröffentlichung
• (wer): Deutsche Bundesbank
• (wo): Frankfurt a. M.
• (wann): 2018

Weitere Informationen

• Handle: http://hdl.handle.net/10419/180677
• Letzte Aktualisierung: 10.03.2025, 11:43 MEZ