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Countercyclical contingent capital

Author

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  • Barucci, Emilio
  • Del Viva, Luca

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).

Suggested Citation

  • Barucci, Emilio & Del Viva, Luca, 2012. "Countercyclical contingent capital," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1688-1709.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:6:p:1688-1709
    DOI: 10.1016/j.jbankfin.2012.01.016
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:reveco:v:53:y:2018:i:c:p:98-108 is not listed on IDEAS
    2. Attaoui, Sami & Poncet, Patrice, 2015. "Write-Down Bonds and Capital and Debt Structures," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 97-119.
    3. Yang, Zhaojun & Zhao, Zhiming, 2015. "Valuation and analysis of contingent convertible securities with jump risk," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 124-135.
    4. Dandan Song & Zhaojun Yang, 2016. "Contingent Capital, Real Options, and Agency Costs," International Review of Finance, International Review of Finance Ltd., vol. 16(1), pages 3-40, March.

    More about this item

    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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