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Countercyclical contingent capital

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  • Barucci, Emilio
  • Del Viva, Luca
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    Abstract

    We analyze the optimal capital structure of a bank issuing countercyclical contingent capital, i.e., notes to be converted into common shares in poor macroeconomic conditions. A comparison of the main effects produced by the countercyclical asset with the simple equity-debt capital structure, the non-countercyclical contingent capital and the countercyclical callable bond is conducted. We demonstrate that this type of asset reduces the spread of straight debt and is effective in reducing the asset substitution incentive. The reduction of bankruptcy costs is strong only when the countercyclicality feature is removed. Contingent capital is useful for macroprudential regulation and we show that the countercyclical feature is important depending on priorities (moderate the asset substitution incentive or reduce bankruptcy costs).

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 6 ()
    Pages: 1688-1709

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:6:p:1688-1709

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Countercyclical callable bonds; Convertible bonds; Capital structure; Macroeconomic conditions; Leverage;

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    References

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