Economics at your fingertips  

How does issuing contingent convertible bonds improve bank's solvency? A Value-at-Risk and Expected Shortfall approach

Piotr Jaworski, Kamil Liberadzki and Marcin Liberadzki

Economic Modelling, 2017, vol. 60, issue C, 162-168

Abstract: This paper examines how issuing an innovative financial instrument called contingent convertible bond (CoCo) may enhance bank's solvency in comparison to issuing a conventional bond. CoCos convert automatically into common equity or have a principal write-down when bank's regulatory capital fails to meet a predetermined level. They have been invented and put into legislation with an objective to absorb losses thus preventing institutions from bankruptcy. From the standpoint of an issuer CoCos bring about two counter effects regarding his solvency: on one hand they recapitalize a bank approaching insolvency on the other hand CoCos pay much higher coupon comparing to conventional bonds. In our model a bank has two funding alternatives: either to issue CoCos or conventional bonds. We measure issuer's default risk using the concept of Value-at-Risk (VaR) and Expected Shortfall (ES). We conclude that CoCos have the potential to strengthen the resilience of the issuer on the condition that the probability of conversion triggering is higher than the VaR's significance level. Our findings can be helpful to the policymakers and banks to better understand the impact of CoCos on issuer's solvency.

Keywords: G010; G210; G280; Hybrid securities; Bank solvency; CoCos; Expected Shortfall; Value-at-Risk (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

Page updated 2020-01-14
Handle: RePEc:eee:ecmode:v:60:y:2017:i:c:p:162-168