Contingent capital, systemically important banks, and the public

Markus P.H. Bürgi ()
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Markus P.H. Bürgi: Swiss Finance Institute, http://www.swissfinanceinstitute.ch/

Journal of Financial Transformation, 2013, vol. 36, 77-92

Abstract: This article discusses the impact of contingent capital on the capital structure decisions of systemically important banks and the consequences for the public. In doing so, the existing literature on capital structure decisions involving contingent capital is extended by presuming the risk aversion of all market participants and by considering both the government’s tax income and its expected rescue costs. It is shown that the use of contingent capital theoretically produces a Pareto improvement for both the bank and the public. However, the subsequent discussion of possible obstacles reveals that such solutions may be difficult to implement in the real world. This is mainly due to the low market liquidity of contingent convertibles (CoCos), insufficient transparency, and non-optimal taxation.

Keywords: contingent capital; systemically important bank; SBI; capital structure decision (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1546

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