Risk-Taking, Competition and Uncertainty: Do Coco Bonds Increase the Risk Appetite of Banks?

55 Pages Posted: 8 May 2020

See all articles by Mahmoud Fatouh

Mahmoud Fatouh

Bank of England; University of Essex; Bank of England

Ioana Neamtu

University of Amsterdam - Amsterdam School of Economics (ASE); Tinbergen Institute

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: March 2020

Abstract

We assess the impact of contingent convertible (CoCo) bonds and the wealth transfers they imply conditional on conversion on risk-taking behaviour of the issuing bank. We also test for regulatory arbitrage: do banks by issuing CoCos try to maintain risk taking incentives when regulators reduce them by insisting on 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 CoCos on risk taking.

Keywords: Bank Capital Structure, Contingent Convertible Bonds, Risk Taking

JEL Classification: G01, G11, G21, G32

Suggested Citation

Fatouh, Mahmoud and Neamtu, Ioana and van Wijnbergen, Sweder, Risk-Taking, Competition and Uncertainty: Do Coco Bonds Increase the Risk Appetite of Banks? (March 2020). CEPR Discussion Paper No. DP14530, Available at SSRN: https://ssrn.com/abstract=3594151

Mahmoud Fatouh (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ioana Neamtu

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Amsterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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