The Impact of Contingent Convertible Bonds on Bank Profitability: Evidence from the EU15 Banking Sector
Following the financial crisis, regulators increased the amount of required quality and quantity of capital in banks. Due to the costly nature of capital, banks created a new financial instrument that would satisfy incoming capital regulation and optimise funding costs. This instrument is the...
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| Format: | Dissertation (University of Nottingham only) |
| Language: | English |
| Published: |
2017
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| Online Access: | https://eprints.nottingham.ac.uk/45361/ |
| Summary: | Following the financial crisis, regulators increased the amount of required quality and quantity of
capital in banks. Due to the costly nature of capital, banks created a new financial instrument that
would satisfy incoming capital regulation and optimise funding costs. This instrument is the
contingent convertible bond (CoCo). CoCos are hybrid capital securities that absorb losses when the
capital of the issuing bank falls below a particular level (Avdjiev, 2013). A number of studies have
examined the various advantages CoCos provide. However, few have reviewed the impact of CoCos
on bank profitability. This paper aims to investigate the research question - To what extent does
CoCo bond issuance affect bank profitability in the EU15? The fixed effects (FE) estimation technique
was used to run bank performance regressions on the top 100 EU15 banks ranked by size. The
results show that CoCo bonds have a statistically significant and positive effect on bank profitability.
The findings from this paper have important implications for banks aiming to optimise business
performance in anticipation of Basel III. The findings also provide further support for regulators’
active encouragement of CoCos to absorb losses in times of distress. |
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