Contingent convertible bonds and macroeconomic stability in a stock‐flow consistent model

Elise Kremer and Bruno Tinel ()
Additional contact information
Elise Kremer: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Universität Bielefeld = Bielefeld University, UP1 - Université Paris 1 Panthéon-Sorbonne
Bruno Tinel: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, WITS - University of the Witwatersrand [Johannesburg]

Post-Print from HAL

Abstract: This paper develops a kaleckian economy in a stock-flow consistent (SFC) model to assess the effect of contingent convertible bonds (CoCos) in terms of stability through numerical simulations. The specific characteristics of the model are a dual sector of households (workers and investors) and a dual banking system (retail banks and investment banks). Two simulations are implemented. One focuses on an increase in defaults on workers' loans which triggers a write-down of CoCos issued by retail banks and the other on a decrease in corporate share prices which triggers a write-down of CoCos issued by investment banks. The overall effects are qualitatively similar. There is a shift of risks and adjustment costs from issuers to holders of CoCos which reduces companies' investment and investing-households' consumption. The simulations show that the triggering of CoCos has a positive effect on the balance sheet of CoCos issuers. It also reduces the cost of bailouts. In return, there is an increase in real and financial instability. Two regulatory recommendations follow from this research. (1) Banks could be required to issue a fraction of their debt in CoCos in order to reduce bailout costs. (2) When CoCos are activated, their issuer could be forced not to intervene on all or part of the financial markets, for a predefined period of time and/or value, in order to limit the destabilisation of price assets.

Date: 2022-11
References: Add references at CitEc
Citations:

Published in Metroeconomica, 2022, 73 (4), pp.1112-1154. ⟨10.1111/meca.12392⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:journl:hal-03844748

DOI: 10.1111/meca.12392

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().