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

Mahmoud Fatouh, Ioana Neamtu and Sweder van Wijnbergen

No 17062, 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 the risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks by issuing CoCo bonds try to maintain risk-taking incentives when regulators reduce them through 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 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)
Date: 2022-02
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