DP17062 Risk-Taking, Competition and Uncertainty: Do Contingent Convertible (CoCo) Bonds Increase the Risk Appetite of Banks?
|Author(s):||Mahmoud Fatou, Ioana Neamtu, Sweder van Wijnbergen|
|Publication Date:||February 2022|
|Keyword(s):||Bank Capital Structure, Contingent Convertible Bonds, risk-taking, Selection Bias|
|JEL(s):||G01, G11, G21, G32|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=17062|
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.