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The Agency of CoCo: Why Do Banks Issue Contingent Convertible Bonds?

40 Pages Posted: 11 Nov 2017  

Roman Goncharenko

Vienna Graduate School of Finance (VGSF)

Steven Ongena

University of Zurich - Department of Banking and Finance; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Asad Rauf

Vienna Graduate School of Finance (VGSF)

Date Written: November 7, 2017

Abstract

Why do banks issue contingent convertible debt? To answer this question we study comprehensive data covering all issues by publicly traded banks in Europe of contingent convertible bonds (CoCos) that count as additional tier 1 capital (AT1). We find that banks with lower asset volatility are more likely to issue AT1 CoCos than their riskier counterparts, but that CDS spreads do not react following issue announcements. Our estimates therefore suggest that agency costs play a crucial role in banks' ability to successfully issue CoCos. The agency costs may be higher for CoCos than for equity explaining why we observe riskier or lowly capitalized banks to issue equity rather than CoCos.

Keywords: CoCos, Contingent Convertible Bonds, Bank Capital Structure

JEL Classification: G01, G12, G24

Suggested Citation

Goncharenko, Roman and Ongena, Steven and Rauf, Asad, The Agency of CoCo: Why Do Banks Issue Contingent Convertible Bonds? (November 7, 2017). CFS Working Paper, No. 586, 2017. Available at SSRN: https://ssrn.com/abstract=3067909

Roman Goncharenko

Vienna Graduate School of Finance (VGSF) ( email )

Nordbergstraße 15
Vienna, 1090
Austria

Steven Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Asad Rauf

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Building D4, 4th Floor
Vienna, Vienna 1020
Austria

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