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Risk-taking and uncertainty: do contingent convertible (CoCo) bonds increase the risk appetite of banks?

Mahmoud Fatouh (), Ioana Neamțu () and Sweder van Wijnbergen ()
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Mahmoud Fatouh: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Ioana Neamțu: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 938, Bank of England working papers from Bank of England

Abstract: We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks try to maintain risk-taking incentives by issuing CoCo bonds, when regulators reduce them through higher capitalisation ratios? While we test for, and reject sample selection bias, we show that CoCo bonds issuance has a strong positive effect on risk-taking behaviour, and so do conversion parameters that reduce dilution of existing shareholders upon conversion. Higher economic volatility amplifies the impact of CoCo bonds on risk-taking.

Keywords: Contingent convertible bonds; risk-taking; bank capital structure; selection bias (search for similar items in EconPapers)
JEL-codes: G01 G11 G21 G32 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2021-08-27
New Economics Papers: this item is included in nep-isf, nep-ore and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0938

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