Risk-taking, competition and uncertaint : do contingent convertible (CoCo) bonds increase the risk appetite of banks?

Mahmoud Fatouh, Ioana Neamtu, Sweder van Wijnbergen

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 e↵ect 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.

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Year of publication:	[2022]
Authors:	Fatouh, Mahmoud ; Neamtu, Ioana ; Wijnbergen, Sweder van
Publisher:	Amsterdam, The Netherlands : Tinbergen Institute
Subject:	contingent convertible bonds \| risk-taking \| bank capital structure \| selection bias \| Wandelanleihe \| Convertible bond \| Bankrisiko \| Bank risk \| Risikopräferenz \| Risk attitude \| Kapitalstruktur \| Capital structure \| Theorie \| Theory \| Bank \| Basler Akkord \| Basel Accord \| Risikomanagement \| Risk management \| Risiko \| Risk \| Kreditrisiko \| Credit risk