Countercyclical contingent capital

Barucci, Emilio; Viva, Luca Del

doi:10.1016/j.jbankfin.2012.01.016

Cited by 22 publications

(7 citation statements)

References 26 publications

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“…Himmelberg and Tsyplakov () consider the ‘soft trigger’ case in which the conversion does not necessarily occur at the first instant when the trigger is breached. For discussions on further conversion mechanisms refer to Barucci and Viva () and Hilscher and Raviv () among others.…”

Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.

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Section: Literature Review and Intuitive Analysismentioning

confidence: 99%

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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“…The following papers make a detailed discussion on capital structure including CoCo: Albul et al (2013) provide a formal capital structure model with CoCo and an exogenous conversion barrier defined in terms of asset value. Barucci and Del Viva (2012) analyze the optimal capital structure of a bank issuing countercyclical CoCos, that is, notes to be converted in common shares in case of a bad state of the economy. Barucci and Del Viva (2013) study the optimal capital structure of a firm issuing the perpetual CoCo, SB, and equity with a two-period model.…”

Section: B Literature Reviewmentioning

confidence: 99%

Contingent Capital, Real Options, and Agency Costs

Song

Yang²

2016

Int Rev Finance

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This paper aims to clarify how contingent convertible bond (CoCo) as a debt financing instrument affects a firm's investment policy, agency cost of debt, and capital structure. We consider endogenous and exogenous conversion thresholds, respectively. Under the exogenous case, there is an explicit optimal fraction of equity allocated to CoCo holders upon conversion, such that the agency cost reaches zero. Numerical analysis demonstrates that under an endogenous conversion threshold, CoCo induces overinvestment, a higher leverage, a possible bigger agency cost, and a stronger incentive to increase risk. But if the conversion threshold is exogenously determined, almost the opposite holds true.

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“…Calomiris and Herring propose CoCos can provide strong incentives for effective risk governance by regulated banks, and help limit regulatory forbearance [4]. Barucci and Viva consider that contingent capital reduces the spread of straight debt and is effective in reducing the asset substitution incentive [5]. Fiordelisi et al find evidence that equity conversion CoCos can reduce several measures of downside risk [6].…”

Section: Introductionmentioning

confidence: 99%

The Design of Stratified Contingent Bank Liability Structure to Release Risk Incentive Effects

Wang¹,

Qin²

2021

JFA

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This paper proposes a new type of bank liability structure with stratified contingent capital based on the suggestions of Basel III and TLAC Term Sheet. It try to solve the problem that the total loss absorbing capacity of global systemically important banks is insufficient and the single contingent capital-CoCos will bring extra risk to the bank in recent years. Compared with single contingent capital, the bail-in mechanism of stratified contingent capital is more complex and its risk effects will be more uncertain. Therefore, this paper studies how to design the parameters setting of stratified contingent liability structure to release the incentive effect of original shareholders' risk taking. Firstly, it analyzed the basic setting of bank capital structure and bail-in mechanism. And then, it calculated the value of CoCos, TLAC bonds, and original shareholders' equity by replicating payoffs using sets of exotic options. Finally, it calculated the elasticity of the original shareholders' equity value to the volatility of asset value. The elasticity is used to analyze the incentive effect of original shareholders' risk taking. The numerical analysis shows that risk incentive effect is more sensitive to the parameters setting of CoCos. In any case, conversion rate has a more important impact than the trigger threshold. In particular, the effect of risk taking can be eliminated by setting the parameters properly.

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Countercyclical contingent capital

Cited by 22 publications

References 26 publications

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Contingent Capital, Real Options, and Agency Costs

The Design of Stratified Contingent Bank Liability Structure to Release Risk Incentive Effects

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