Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/274667 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
IWH Discussion Papers No. 1/2022
Version Description: 
This version: August 27, 2023
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
Abstract: 
This paper examines the effect of CoCo bonds that qualify as additional tier 1 capital on bank fundamentals. The results reveal a significant reduction in the distance to insolvency following the hybrid bond issuance due to increased earnings volatility. Further analyses suggest a link between CoCo issuance and more active earnings management, evidenced by a higher standard deviation of loan loss provisions and impairment charges. The findings substantiate long-standing theoretical hypotheses suggesting that the regulatory design requirements for going-concern CoCos adversely affect bank stability. Furthermore, they correspond to the notion that private monitoring is largely absent as a corrective measure due to prevailing uncertainties and information frictions.
Subjects: 
AT1 capital
bank stability
Basel III
CoCo bonds
earnings volatility
JEL: 
G21
G28
G32
Document Type: 
Working Paper

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