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Bank risk-taking: are contingent convertibles a resolution mechanism?

Author

Listed:
  • Christine Maati-Sauvez

    (IDP - Institut du Développement et de la Prospective - EA 1384 - UVHC - Université de Valenciennes et du Hainaut-Cambrésis - IAE - Institut d'Administration des Entreprises - UPHF - Université Polytechnique Hauts-de-France)

Abstract

CoCos (contingent convertibles) are recent hybrid securities which are converted into equity when banks are in need of a recapitalization. Our model derives an optimal capital structure endogenously while also allowing for bank risk choice. It shows that CoCos significantly reduce their probability of failure although they cannot completely protect banks against bankruptcy. Moreover, they may destroy wealth due to greater incentives for shareholders to risk-take.

Suggested Citation

  • Christine Maati-Sauvez, 2013. "Bank risk-taking: are contingent convertibles a resolution mechanism?," Post-Print hal-02926868, HAL.
    • Handle: RePEc:hal:journl:hal-02926868
    as

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