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Increasing profitability through contingent convertible capital: Empirical evidence from European banks

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  • Petras, Matthias

Abstract

This study investigates the effects of using additional tier 1 (AT1) capital instruments on bank profitability. It is motivated by the fact that the use of contingent convertible bonds (CoCo bonds) instead of equity offers a tax shield and incentives for efficient risk taking. I empirically analyze a panel dataset of 231 banks from EEA countries as well as Switzerland from 2014 to 2018. My analysis shows that the potential tax shield partly determines the use of CoCo bonds, and that the use of CoCo bonds instead of equity as AT1 capital significantly increases bank profitability.

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  • Petras, Matthias, 2022. "Increasing profitability through contingent convertible capital: Empirical evidence from European banks," Global Finance Journal, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:glofin:v:52:y:2022:i:c:s1044028320302829
    DOI: 10.1016/j.gfj.2020.100582
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    More about this item

    Keywords

    CoCo bonds; Contingent capital; Bank profitability;
    All these keywords.

    JEL classification:

    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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