Corporate Bond Clawbacks as Contingent Capital
We propose a clawback-type security (COCLA) as an alternative source of contingent capital for banks. We develop a equilibrium model that contains several distinctive features not found in the existing literature. A bank owner/manager maximizes her expected utility by choosing the bank’s loans supply and the amount of junior debt and by exercising effort to screen credit quality of borrowers. The manager has the choice to convert and the decision results from the trade off she faces between the private benefits of control and the expected costs of financial distress, thus, getting around the so called “trigger problem”. We show that the clawback conversion rate that maximizes the manager/owner expected utility, the level of her effort and amount of loans is 30%. Our model endogenizes many features of the actual decision problems faced by banks and provides for a security that is socially beneficial as the credit for consumers is increased when compared with the outcomes of simply using straight subordinated or convertible debt. The results of the model are robust and calibration of the model produces bank asset and debt structures that are very close to that of the average top 60 largest banks in the USA.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Koziol, Christian & Lawrenz, Jochen, 2012. "Contingent convertibles. Solving or seeding the next banking crisis?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 90-104.
- George M. von Furstenberg, 2011. "Concocting Marketable Cocos," Working Papers 222011, Hong Kong Institute for Monetary Research.
- 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, 04.
- Daniels, Kenneth N. & Hurtado, Fernando Díaz & Ramírez, Gabriel G., 2013. "An empirical investigation of corporate bond clawbacks (IPOCs): Debt renegotiation versus exercising the clawback option," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 14-21.
- Edward Simpson Prescott, 2012.
"Contingent capital: the trigger problem,"
Federal Reserve Bank of Richmond, issue 1Q, pages 33-50.
- Edward Simpson Prescott, 2011. "Contingent capital: the trigger problem," Working Paper 11-07, Federal Reserve Bank of Richmond.
- Pennacchi, George & Vermaelen, Theo & Wolff, Christian C. P., 2014. "Contingent Capital: The Case of COERCs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(03), pages 541-574, June.
- Pennacchi, George G. & Vermaelen, Theo & Wolff, Christian C, 2010. "Contingent Capital: The Case for COERCs," CEPR Discussion Papers 8028, C.E.P.R. Discussion Papers.
- Christian Wolff & Theo Vermaelen & George Pennacchi, 2010. "Contingent Capital: The Case for COERCs," LSF Research Working Paper Series 10-08, Luxembourg School of Finance, University of Luxembourg.
- repec:fip:fedreq:y:2012:i:1q:p:33-50:n:vol.98no.1 is not listed on IDEAS Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ptl:wpaper:44. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Enrique Calfucura)
If references are entirely missing, you can add them using this form.