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TLAC bonds and bank risk-taking

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  • Homma, Yasutake
  • Suzuki, Katsushi

Abstract

This study explores the relation between total loss-absorbing capacity (TLAC) bonds and bank risk-taking. TLAC bonds contain a unique instrument in that they entail “structural subordination,” which enables them to be converted into equity to resolve a failure of subsidiaries of global systemically important banks (G-SIBs). Given the debate in the literature over the impact of subordinated bonds on issuers’ risk-taking, we find that a larger amount of TLAC bond issuance is associated with higher risk. Although TLAC regulation is designed to mitigate systemic risk, we unveil the opposite result, which may increase the probability of G-SIB default.

Suggested Citation

  • Homma, Yasutake & Suzuki, Katsushi, 2023. "TLAC bonds and bank risk-taking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:intfin:v:87:y:2023:i:c:s104244312300063x
    DOI: 10.1016/j.intfin.2023.101795
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