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

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.

Have European banks maintained their payout policy during the crisis? The role of scrip dividends

“…Thus, our sample can be considered as sufficiently representative of the European bank landscape. The combination of cross‐section and time series data gives a final sample of 395 observations, a sample size comparable to other studies on the banking sector (Almaqtari, Al‐Homaidi, Tabash, & Farhan, 2019; Anderson, Ruiz‐Ortega, & Tressel, 2017; Echevarria‐Icaza & Sosvilla‐Rivero, 2018; Kusi & Opoku‐Mensah, 2018; Loaba & Zahonogo, 2019; Lobão, Pacheco, & Campos, 2019; Ofori‐Sasu, Mensah, Akuma, & Doku, 2019; Salih, Ghecham, & Al‐Barghouthi, 2019). Data regarding the balance sheet and market prices were obtained from the Thomson Reuters Eikon database.…”

Contingent convertible bonds and macroeconomic stability in a stock‐flow consistent model

“…More recently two papers grasped CoCos from the point of view of systemic risk. Echevarria‐Icaza and Sosvilla‐Rivero (2017) show by decomposing banks' capital that the regulatory capital requirements imposed since 2009 have led systemic banks to favour the issuance of PWD CoCos in order to minimize dilution effects. In another empirical analysis, Fajardo and Mendes (2019) show that the first issuance reduces systemic risk while subsequent issuances may adversely increase it.…”