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The impact of CoCo bonds on banking system's net value

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  • LI, Ping
  • GUO, Yanhong
  • MENG, Hui
  • HUANG, Lixin

Abstract

This paper investigates the impact of Contingent Convertible (CoCo) bonds on systemic financial risk by considering the banking system's net value. We first conduct a theoretical analysis of how CoCo bonds affect the net value of banking system by considering the loss contagion and liquidity risk. Then, we use data from 15 Chinese commercial banks to illustrate our results and obtain some interesting findings. Specifically, we provide the changing trend of systemic net value with respect to shocks and the amount of write-down (WD) bonds, showing that WD bonds can save banks from the dilemma. Finally, we present some suggestions for commercial banks.

Suggested Citation

  • LI, Ping & GUO, Yanhong & MENG, Hui & HUANG, Lixin, 2022. "The impact of CoCo bonds on banking system's net value," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000642
    DOI: 10.1016/j.frl.2022.102743
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    References listed on IDEAS

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    1. Viral V. Acharya & Denis Gromb & Tanju Yorulmazer, 2012. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 184-217, April.
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    3. Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Liquidity and Risk Management," American Economic Review, American Economic Association, vol. 97(2), pages 193-197, May.
    4. Glasserman, Paul & Young, H. Peyton, 2015. "How likely is contagion in financial networks?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 383-399.
    5. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
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    7. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
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    Cited by:

    1. Song Jiaxin, 2023. "Announcement Effect Study of Issuing Tier 2 Capital Bonds on the Stock Price of China Construction Bank," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(6), pages 1-4.

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