Optimal Capital Structure of Banks with Contingent Capital: A Structural Model

18 Pages Posted: 26 Aug 2011  

Christine Maati-Sauvez

University of Lille North of France - Institute of Business Administration

Jerome MAATI

University of Lille North of France - Lille Institute of Business Administration

Date Written: June 1, 2011

Abstract

This paper justifies, in an agency context, the existence of hybrid securities appeared very recently on the organized market: the cocos (contingent convertible bonds). Like the straight debt, they make it possible to profit from tax benefits of debt. And, like stocks, they provide protection against financial distress. Although cocos cannot completely protect banks against bankruptcy, they reduce significantly their probability of failure independent of regulator actions. The structural model shows that the cocos allow an increased valorization of the banks without jeopardizing their stability. However, it should pay special attention to their design under penalty of not being able to provide an efficient mean of financing to investors. Particular attention should be paid to the fixing of the value of the trigger. Its optimal value is highly dependent on the environment (structure and amount of bankruptcy costs, intensity of the dilution of shareholder claims, tax environmental and so on).

Keywords: bank, capital structure, contingent capital, asset substitution, financial crisis, banking governance

JEL Classification: G12, G13, G21, G28, G32

Suggested Citation

Maati-Sauvez, Christine and MAATI, Jerome, Optimal Capital Structure of Banks with Contingent Capital: A Structural Model (June 1, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1917370 or http://dx.doi.org/10.2139/ssrn.1917370

Christine Maati-Sauvez

University of Lille North of France - Institute of Business Administration ( email )

Rue des cent tetes
Les Tertiales
Valenciennes cedex 9, Nord 59313
France

Jerome MAATI (Contact Author)

University of Lille North of France - Lille Institute of Business Administration ( email )

104, Avenue du Peuple Belge
LILLE, 59043
France

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