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

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  • Victor Echevarria†Icaza
  • Simón Sosvilla†Rivero

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.

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  • Victor Echevarria†Icaza & Simón Sosvilla†Rivero, 2018. "Systemic banks, capital composition, and CoCo bonds issuance: The effects on bank risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 122-133, April.
    • Handle: RePEc:wly:ijfiec:v:23:y:2018:i:2:p:122-133
    DOI: 10.1002/ijfe.1607
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    Cited by:

    1. David Blanco‐Alcántara & Jorge Gallud‐Cano & Félix J. López‐Iturriaga & Óscar López‐de‐Foronda, 2022. "Have European banks maintained their payout policy during the crisis? The role of scrip dividends," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4619-4632, October.

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