Call Me Maybe? The Effects of Exercising Contingent Capital

Boris Vallee

Working Papers from HAL

Abstract: This paper empirically investigates the effects of banks triggering contingent capital instruments by studying liability management exercises, which bear comparable regulatory capital effects. These actions create core tier one capital by crystalizing losses on hybrid debt holders. Banks' use of liability management exercises, and the market reaction to them, are consistent with these exercises relaxing a regulatory capital constraint. The created value mainly accrues to debt holders, and does not generate a negative signal. Liability management exercises prove effective at improving bank capitalization levels. These findings strengthen the case for contingent capital instruments as an alternative to raising bank capital requirements.

Keywords: Contingent Capital; Financial Distress; Debt Overhang; Financial Institutions (search for similar items in EconPapers)
Date: 2013-10-29
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-02058240

DOI: 10.2139/ssrn.2346376

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