Risk-Taking, Competition and Uncertainty: Do CoCo Bonds Increase the Risk Appetite of Banks?

Sweder van Wijnbergen, Mahmoud Fatouh and Ioana Neamtu

No 14530, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks by issuing CoCos try to maintain risk taking incentives when regulators reduce them by insisting on higher capitalization 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 volatility amplifies the impact of CoCos on risk taking.

Keywords: Contingent convertible bonds; Risk taking; Bank capital structure (search for similar items in EconPapers)
JEL-codes: G01 G11 G21 G32 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban, nep-ore and nep-rmg
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Citations: View citations in EconPapers (1)

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