Working Paper: CEPR ID: DP17062
Authors: Sweder van Wijnbergen; Ioana Neamtu; Mahmoud Fatou
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
JEL Codes: G01; G11; G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| issuance of CoCo bonds (G33) | risk-taking behavior of banks (G21) |
| higher volatility (G17) | impact of CoCo bonds on risk-taking (F65) |
| wealth transfer from CoCo holders to existing shareholders (G34) | risk-taking behavior of banks (G21) |
| design of CoCo bonds (G33) | banks' risk-taking incentives (G21) |