Risk-Taking, Competition and Uncertainty: Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks?

Arbeitspapier

We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks try to maintain risk-taking incentives by issuing CoCo bonds, when regulators reduce them through higher capitalization ratios? While we test for, and reject sample selection bias, we show that CoCo bonds issuance has a strong positive effect on risk-taking behaviour, particularly with conversion parameters that reduce dilution of existing shareholders upon conversion. Higher economic volatility amplifies the impact of CoCo bonds on risk-taking.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2022-017/IV

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Portfolio Choice; Investment Decisions ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: contingent convertible bonds ; risk-taking ; bank capital structure ; selection bias

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fatouh, Mahmoud ; Neamtu, Ioana ; van Wijnbergen, Sweder
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/263937
• Last update: 10.03.2025, 11:44 AM CET