Increasing Profitability Through Contingent Convertible Capital: Empirical Evidence From European Banks

39 Pages Posted: 24 Sep 2018 Last revised: 6 Dec 2018

See all articles by Matthias Petras

Matthias Petras

University of Cologne - Department of Banking; University of Cologne; University of Cologne - Faculty of Management, Economics and Social Sciences

Date Written: September 6, 2018

Abstract

The purpose of this paper is to conduct an empirical analysis of the use of contingent convertible capital as additional tier 1-capital (CoCo-AT1-capital) and its determinants and to study its implications for bank profitability. I analyse a panel dataset of 231 banks from EEA-countries as well as Switzerland from 2014 to 2017. The determinants analysis is based on a unique dataset of capital components to examine determinants of CoCo-AT1-capital on a level basis. It reveals that the use of CoCo-AT1-capital is significantly driven by earnings, loan loss provisions, and the business model of banks. Regarding the consequences for profitability, I am the first to analyse the implications of CoCo-AT1-capital usage on bank profitability. Empirical analysis yields that using CoCo-AT1-capital significantly increases bank profitability, measured as Return on Assets and Return on Risk-weighted Assets. However, the elevated profitability cannot undoubtedly be attributed to the tax shield of CoCo-AT1-capital alone, but most reasonably be explained by inherent value adding incentive effects. Anyway, banks are well-advised to exploit the benefits of CoCo-AT1-capital.

Keywords: CoCo-Bonds, Contingent Capital, Capital Regulation, Bank Profitability, Capital Structure

JEL Classification: G21, G28, G32

Suggested Citation

Petras, Matthias, Increasing Profitability Through Contingent Convertible Capital: Empirical Evidence From European Banks (September 6, 2018). Available at SSRN: https://ssrn.com/abstract=3245256 or http://dx.doi.org/10.2139/ssrn.3245256

Matthias Petras (Contact Author)

University of Cologne - Department of Banking ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://www.bankseminar.uni-koeln.de/en/seminar/staff/staff/petras/

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Richard-Strauss-Str. 2
Cologne, D-50923
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
98
rank
261,158
Abstract Views
365
PlumX Metrics