The adverse effect of contingent convertible bonds on bank stability / Melina Ludolph
VerfasserLudolph, Melina
ErschienenHalle (Saale), Germany : Halle Institute for Economic Research (IWH) - Member of the Leibniz Association, [18. Januar 2022]
Umfang1 Online-Ressource (III, 50 Seiten, 1,35 MB) : Diagramme
SerieIWH-Diskussionspapiere ; 2022, no. 1 (January 2022)
SchlagwörterAT1 capital / bank risk / Basel III / CoCo bonds
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This paper examines the impact of issuing contingent convertible (CoCo) bonds on bank risk. I apply a matching-based difference-in-differences approach to banklevel data for 246 publicly traded European banks and 61 CoCo issues from 2008−2018. My estimation results reveal that issuing CoCo bonds that meet the criteria for additional tier 1 (AT1) capital results in significantly higher z-scores one to three years after the issuance. Rather than having a net negative impact issuing CoCos seems to impede a positive time trend towards greater bank stability. This study adds to the empirical literature on the risk-effect of contingent convertibles by identifying the causal effect of AT1 CoCo bonds on reported risk changes over a three-year post-treatment horizon based on a comprehensive sample of European banks. The results confirm theoretical predictions that currently outstanding CoCo bonds create incentives for excessive risk-taking.