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Systemic banks, capital composition and CoCo bonds issuance:The effects on bank risk

Author

Listed:
  • Simón Sosvilla-Rivero

    (Department of Quantitative Economics, Universidad Complutense de Madrid)

  • Victor Echevarria Icaza

    (Universidad Complutense de Madrid Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa))

Abstract

This paper shows that systemic banks are prone to increase their regulatory capital ratio through a decline in risk-weighted assets density and an intense use of lower level capital. The market access of systemic banks, and the fact that they were singled out for higher capital requirements seem to have biased them towards lower level capital, consistent with the theory that asymmetric information drives capital decisions. These effects are particularly strong for institutions that had a rather low level of capitalization at the start of the period and for those that exhibited a strong use of Additional Tier I capital before the regulatory changes. Strict capital composition requirements for firms with lower buffers would be an improvement.

Suggested Citation

  • Simón Sosvilla-Rivero & Victor Echevarria Icaza, 2017. "Systemic banks, capital composition and CoCo bonds issuance:The effects on bank risk," Working Papers 17-03, Asociación Española de Economía y Finanzas Internacionales.
    • Handle: RePEc:aee:wpaper:1703
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    Cited by:

    1. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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

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