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How does issuing contingent convertible bonds improve bank's solvency? A Value-at-Risk and Expected Shortfall approach


  • Jaworski, Piotr
  • Liberadzki, Kamil
  • Liberadzki, Marcin


This paper examines how issuing an innovative financial instrument called contingent convertible bond (CoCo) may enhance bank's solvency in comparison to issuing a conventional bond. CoCos convert automatically into common equity or have a principal write-down when bank's regulatory capital fails to meet a predetermined level. They have been invented and put into legislation with an objective to absorb losses thus preventing institutions from bankruptcy. From the standpoint of an issuer CoCos bring about two counter effects regarding his solvency: on one hand they recapitalize a bank approaching insolvency on the other hand CoCos pay much higher coupon comparing to conventional bonds. In our model a bank has two funding alternatives: either to issue CoCos or conventional bonds. We measure issuer's default risk using the concept of Value-at-Risk (VaR) and Expected Shortfall (ES). We conclude that CoCos have the potential to strengthen the resilience of the issuer on the condition that the probability of conversion triggering is higher than the VaR's significance level. Our findings can be helpful to the policymakers and banks to better understand the impact of CoCos on issuer's solvency.

Suggested Citation

  • Jaworski, Piotr & Liberadzki, Kamil & Liberadzki, Marcin, 2017. "How does issuing contingent convertible bonds improve bank's solvency? A Value-at-Risk and Expected Shortfall approach," Economic Modelling, Elsevier, vol. 60(C), pages 162-168.
  • Handle: RePEc:eee:ecmode:v:60:y:2017:i:c:p:162-168
    DOI: 10.1016/j.econmod.2016.09.025

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    References listed on IDEAS

    1. Lee, Jin-Ping & Yu, Min-Teh, 2007. "Valuation of catastrophe reinsurance with catastrophe bonds," Insurance: Mathematics and Economics, Elsevier, vol. 41(2), pages 264-278, September.
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    5. Chen, Xiangjin B. & Silvapulle, Param & Silvapulle, Mervyn, 2014. "A semiparametric approach to value-at-risk, expected shortfall and optimum asset allocation in stock–bond portfolios," Economic Modelling, Elsevier, vol. 42(C), pages 230-242.
    6. Berg, Tobias & Kaserer, Christoph, 2015. "Does contingent capital induce excessive risk-taking?," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 356-385.
    7. Hilscher, Jens & Raviv, Alon, 2014. "Bank stability and market discipline: The effect of contingent capital on risk taking and default probability," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 542-560.
    8. Patrick Bolton & Frédéric Samama, 2012. "Capital access bonds: contingent capital with an option to convert," Economic Policy, CEPR;CES;MSH, vol. 27(70), pages 275-317, April.
    9. Asli Demirguc‐Kunt & Enrica Detragiache & Ouarda Merrouche, 2013. "Bank Capital: Lessons from the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1147-1164, September.
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    Cited by:

    1. Guglielmo Maria Caporale & Woo-Young Kang, 2019. "On the preferences of CoCo bond buyers and sellers: a logistic regression analysis," CESifo Working Paper Series 7551, CESifo Group Munich.

    More about this item


    G010; G210; G280; Hybrid securities; Bank solvency; CoCos; Expected Shortfall; Value-at-Risk;

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