Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2022-02-27
Number: 22-017/IV 
Author-Name: Mahmoud Fatouh
Author-Workplace-Name: University of Essex
Author-Name: Ioana Neamtu
Author-Workplace-Name: Bank of England
Author-Name: Sweder van Wijnbergen
Author-Workplace-Name: University of Amsterdam
Title: Risk-Taking, Competition and Uncertainty: Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks?
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.
Classification-JEL: G01, G11, G21, G32
Keywords: contingent convertible bonds, risk-taking, bank capital structure, selection bias
File-Url: https://papers.tinbergen.nl/22017.pdf
File-Format: application/pdf
File-Size: 999,992 bytes 
Handle: RePEc:tin:wpaper:20220017