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

Mahmoud Fatouh, Ioana Neamtu and Sweder van Wijnbergen
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Mahmoud Fatouh: University of Essex
Ioana Neamtu: Bank of England

No 22-017/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

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 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, particularly with 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)
Date: 2022-02-27
New Economics Papers: this item is included in nep-cwa, nep-ore and nep-rmg
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Related works:
Working Paper: Risk-Taking, Competition and Uncertainty: Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20220017

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