Removing Moral Hazard and Agency Costs in Banks: Beyond CoCo Bonds

Kenjiro Hori and Jorge Martin Ceron
Additional contact information
Jorge Martin Ceron: Department of Economics, Mathematics & Statistics, Birkbeck

No 1603, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: The convex payoffs for equityholders in a corporate structure results in agency costs and moral hazard problems. The implicit government guarantee for banks accentuates these. We believe that the Basel III related bail-in contingent convertible (CoCo) structures do only not solve these problems, but may even aggravate them. In this paper we suggest solutions. The first is to replace the currently issued writedown/off and equity-conversion CoCo structures with a market-price equity-conversion CoCo bonds. This mirrors the full dilution effect of an ordinary equity raise in a distressed situation to reduce incentives for high risk-taking by equityholders. The second is to establish a Contingent Equity Base that replaces the incumbent shareholders once the CoCo is triggered. This will finally remove the perverse risk-taking incentives. The valuation of the CEB is then suggested.

Keywords: CoCo bond; agency costs; moral hazard; bail-in; cost of equity. (search for similar items in EconPapers)
JEL-codes: D82 G21 G28 G32 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-ban and nep-cfn
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://eprints.bbk.ac.uk/id/eprint/15261 First version, 2016 (application/pdf)

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: https://EconPapers.repec.org/RePEc:bbk:bbkefp:1603

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics Malet Street, London WC1E 7HX, UK.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).