Contingent Convertible Bonds in a General Equilibrium Model
53 Pages Posted: 21 Sep 2017
Date Written: September 20, 2017
This contribution discusses bail-in instruments in a general equilibrium model with a continuum of banks and households. We show that if banks are already endowed with bail-in securities, they are effective in mitigating debt overhang and increase household financial wealth. However, a pure private sector debt restructuring is not sustainable and needs public sector intervention. If a bail-in program is implemented it creates incentives for high default probability banks to invest. In comparison to other interventions such as an asset purchase program, implementing a bail-in program induces larger redistributions and therefore potentially larger social costs.
Keywords: Contingent capital, Bail-in instruments, Restructuring mechanisms, Debt overhang
JEL Classification: G32, G21, G28
Suggested Citation: Suggested Citation