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Do contingent convertible bonds reduce systemic risk?

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  • Mendes, Layla dos Santos
  • Leite, Rodrigo de Oliveira
  • Fajardo, José

Abstract

In this paper, we implement an empirical analysis to discuss the impact of CoCo bond issuance on the systemic risk using three systemic risk measures for banks: SRISK, SES and ΔCoVaR. Our results show that issuing CoCo bonds the first time decreases systemic risk as a positive response to a future crisis. However, the second issuance increases the systemic risk, possibly by demonstrating a higher risk of financial distress or capital needs. Moreover, we provide evidence that smaller banks, banks with larger loans ratios to their total assets, and banks with unstable sources of funding are more benefited by CoCo issuance. We also perform robustness checks for all the findings and discuss policy implications.

Suggested Citation

  • Mendes, Layla dos Santos & Leite, Rodrigo de Oliveira & Fajardo, José, 2022. "Do contingent convertible bonds reduce systemic risk?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:intfin:v:78:y:2022:i:c:s1042443122000439
    DOI: 10.1016/j.intfin.2022.101554
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    More about this item

    Keywords

    Systemic risk; CoCo bonds; Crisis;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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