CoCo Bonds, Bank Stability, and Earnings Opacity

Melina Ludolph

No 1/2022, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: This paper examines the effect of CoCo bonds that qualify as additional tier 1 capital on bank stability and reporting. The results reveal a significant reduction in the distance to insolvency following the hybrid bond issuance due to increased earnings volatility. Banks report less stable net income due to more volatile loss provisions, which increases earnings opacity rather than reflects changes in asset quality. The findings are consistent with the premise that persistent uncertainty and misconceptions among investors about bail-in likelihoods limit their monitoring engagement, which results in banks becoming less transparent.

Keywords: AT1 capital; bank stability; Basel III; CoCo bonds; earnings opacity (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 M41 (search for similar items in EconPapers)
Date: 2024, Revised 2024
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:12022

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