The Impact of Contingent Convertible Bonds on Bank Profitability: Evidence from the EU15 Banking Sector

Kinlocke, G (2017) The Impact of Contingent Convertible Bonds on Bank Profitability: Evidence from the EU15 Banking Sector. [Dissertation (University of Nottingham only)]

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Abstract

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.

Item Type: Dissertation (University of Nottingham only)
Depositing User: KINLOCKE, GARTH
Date Deposited: 10 Apr 2018 13:34
Last Modified: 10 Apr 2018 18:15
URI: http://eprints.nottingham.ac.uk/id/eprint/45361

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