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

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  • Victor Echevarria-Icaza

    () (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)

  • Simón Sosvilla-Rivero

    () (Instituto Complutense de Estudios Internacionales (ICEI). Universidad Complutense de Madrid.)

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

  • Victor Echevarria-Icaza & Simón Sosvilla-Rivero, 2017. "Systemic banks, capital composition and CoCo bonds issuance: The effects on bank risk," Working Papers del Instituto Complutense de Estudios Internacionales 1706, Universidad Complutense de Madrid, Instituto Complutense de Estudios Internacionales.
  • Handle: RePEc:ucm:wpaper:1706
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    References listed on IDEAS

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    More about this item

    Keywords

    Contingent capital; Banking regulation; Risk-taking incentives; Asset substitution; Systemic risk.;

    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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