Are CoCo Bonds a Good Substitute for Equity? Evidence from European Banks

Harald Hau and Gabriela Hrasko
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Gabriela Hrasko: University of Geneva; Swiss Finance Institute

No 18-67, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Following the 2008-9 financial crisis, large banks increasingly issued contingent convertible bonds (CoCo bonds) to increase their capital buffers – a policy supported by national bank regulators. This paper examines whether the issuance of CoCo bonds provides the same reduction in bank default risk as the corresponding issuance of common equity by analyzing the premium reduction in (single name) credit default swaps (CDS) around the corresponding issuance announcement events. We find that the default risk reduction associated with issuance crucially depends on the CoCo bond’s design features: Only CoCo bond designs with permanent write-down features provide a default risk reduction similar to equity. CoCo bonds with equity conversion features come with a lower subsequent volatility of the bank asset value, but are inferior to equity in terms of their default risk reduction.

Keywords: CoCo bond; issuance announcement; asset volatility; bank stability (search for similar items in EconPapers)
JEL-codes: G13 G21 G28 G32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-10
New Economics Papers: this item is included in nep-ban and nep-cfn
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1867

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