Contingent Convertible Bonds in a General Equilibrium Model

53 Pages Posted: 21 Sep 2017

Date Written: September 20, 2017

Abstract

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

Lawrenz, Jochen, Contingent Convertible Bonds in a General Equilibrium Model (September 20, 2017). Available at SSRN: https://ssrn.com/abstract=3039978 or http://dx.doi.org/10.2139/ssrn.3039978

Jochen Lawrenz (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria
++43-512-507-7582 (Phone)

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